The demand curve and supply curve for oneyear discount bonds

The demand curve and supply curve for one-year discount bonds with a face value of $1,040 are represented by the following equations:

Bd: Price equals=0.6Quantity+1,160

Bs: Price equals=Quantity+710

Suppose that, as a result of monetary policy actions, the Federal Reserve sells 90bonds that it holds. Assume that bond demand and money demand are held constant. Which of the following statements is true?

A.

If the Fed increases the supply of bonds in the market by

90, at any given price, the bond supply equation will become

Priceequals=Quantity+620.

B.

If the Fed decreases the supply of bonds in the market by

90, at any given price, the bond supply equation will become Priceequals=Quantity+840.

C.

If the Fed decreases the supply of bonds in the market by 90,

at any given price, the bond supply equation will become

Priceequals=Quantity+780.

D.

If the Fed increases the supply of bonds in the market by

90,

at any given price, the bond supply equation will become

Priceequals=Quantity+800.

Solution

When 90 bonds are sold, quantity is reduced by 90 units. So, the new supply equation becomes.,

Priceequals=Quantity+620.

A.

If the Fed increases the supply of bonds in the market by

90, at any given price, the bond supply equation will become

Priceequals=Quantity+620.