Answered: b. How will the open market sale of…

b. How will the open market sale of bonds affect consumption, private saving, and investment in equilibrium? Explain clearly what causes changes in those macroeconomic variables.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter36: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 3PA

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Question

13. Let's assume that consumption depends on disposable income, and investment depends on
the interest rate and output. Government spending is exogenously determined. Consider that
there is an open market sale of bonds by the central bank.
a. In an IS-LM diagram, show the effect of the open market sale of bonds on output and
the interest rate. Explain clearly what causes the curve(s) to shift.
b. How will the open market sale of bonds affect consumption, private saving, and
investment in equilibrium? Explain clearly what causes changes in those macroeconomic
variables.
c. Suppose the federal government wants to maintain output at the initial level. What must
the federal government do in response to the central bank's sale of bonds to restore output?
Show the effect on output and the interest rate using the IS-LM diagram. What effect will this
policy have on private saving?

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