The demand curve and supply curve for one-year discount bonds

The demand curve and supply curve for one-year discount bonds with a face value of $1000 are represented by the following equations:

Bd: Price = -0.6 Quantity + 1140
Bs: Price = Quantity + 700


Suppose that, as a result of monetary policy actions, the Bank of Canada sells 80 of its bonds that it holds. Assume that bond demand and money demand are held constant.

a. How does the Bank of Canada policy affect the bond supply equation?

b. Calculate the effect on the equilibrium interest rate in this market, as a result of the Bank of Canada action.

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...


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