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The Central Bank of the Delta economy has decided to carry out a sale of bonds in the open market
The Central Bank of the Delta economy has decided to carry out a sale of bonds in the open market. The economy has a tax system that is made up of autonomous taxes and taxes proportional to income. Select the CORRECT answer (s):
Response option group
a) Equilibrium consumption decreases as GDP contracts.
b) The price of the bonds increases.
c)The equilibrium GDP of this economy decreases due to the contraction of investment.
d) The government deficit remains constant.
Expert Solution
Option c is correct. The equilibrium GDP of the economy decreases due to the contraction of investment. Because the Central bank of the Delta economy has decided to carry out sale of bond in open market during inflation to reduce money supply. During this period interest will be high, so it will reduce investment in economy. Fall in investment decreases GDP in the economy. All other options are wrong. GDP contracts only if equilibrium consumption level decreases. Price of bonds will decreases if sale of bonds increases. Government deficit will not remain constant if central bank increase the sale of bonds
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