4. Bond Auction (13 points)

The Treasury Department is currently holding an open auction on bonds. Each bond

has a face value of $2,500,000.

Complete all three parts (a-c).

a. Suppose you pay $2,300,000 for the bond at auction. Solve for the interest rate

you receive on this bond. Round to four decimal places.

b . What is the relationship between bond prices and the corresponding interest rate?

c. In order to encourage an increased number of bonds to be sold, the interest rate on

the bond should increase. What impact will this increased interest rate, resulting

from the increased number of bonds to finance government spending have on the aggregate expenditures? What is the name of the effect that arises in this situation?