4. Assume that 1) There are only two assets in asset market: money and bonds....
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4. Assume that 1) There are only two assets in asset market: money and bonds. 2) The demand for bonds decreases when income rises. 3) The supply of bonds is fixed at a given level. a) How does the quantity demanded of bonds vary with the interest rate? b) On a graph with interest rate r on one axis and quantity of bonds B on the other, draw in the demand curve. c) On the same graph draw in the supply of bonds. d) If the bond market is in equilibrium, what must be true for the money market? Prove your conclusion. e) What happens in the bond market when income Y rises? Show this on your diagram. 4. Assume that 1) There are only two assets in asset market: money and bonds. 2) The demand for bonds decreases when income rises. 3) The supply of bonds is fixed at a given level. a) How does the quantity demanded of bonds vary with the interest rate? b) On a graph with interest rate r on one axis and quantity of bonds B on the other, draw in the demand curve. c) On the same graph draw in the supply of bonds. d) If the bond market is in equilibrium, what must be true for the money market? Prove your conclusion. e) What happens in the bond market when income Y rises? Show this on your diagram
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