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Problem 1 An important way in which the Central bank decreases the money supply is by selling bonds to the public (supply of bonds increases.

Problem 1

An important way in which the Central bank decreases the money supply is by selling bonds to the public (supply of bonds increases. Using a supply and demand analysis for bonds, show what effect this action has on the price of bonds and interest rates. You are expected to answer by writing and by completing the following diagram.

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Price Bd Bs Quantity of bonds Price Bd Bs Quantity of bonds

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