Answer to Question #255362 in Macroeconomics for Prisca Mahlalela

Question

Which of the following statements describes the effect of the South African Reserve Bank selling 

government bonds? 

(i) The money supply decreases and the interest rate increases. 

(ii) The money supply increases and the interest rate decreases.

(iii) There is a decrease in equilibrium output in response to increase in interest rate. 

(iv) There is an increase in equilibrium output in response to decrease in interest rate.

A. (i) and (iii) only.

B. (ii) only.

C. (ii) and (iv) only.

D. (ii) and (iii) only.

Answer 1

• The answer is A. (i) and (iii) only.

When the South African Reserve Bank sells government bonds, it receives money in exchange for bonds. Hence, the money supply in the economy will decline. The drop in the supply of money will cause a hike in the interest rate. A high interest rate will discourage consumption and investment and thus cause a fall in the equilibrium output in an economy.