Answer to Question #259523 in Macroeconomics for Mercy

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 the increase in the interest rate. 

IV.There is an increase in equilibrium output in response to the decrease in the interest rate.

Group of answer choices

(I) and (III) only.

(II) and (IV) only.

II) only.

(II) and (III) only.

Answer 1

The answer is (I) and (III) only.

I.The money supply decreases and the interest rate increases.

III.There is a decrease in equilibrium output in response to the increase in the interest rate.

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