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Unformatted text preview: What has happened to bond prices? 5. Now draw the bond market in equilibrium. Now suppose that the Federal Reserve decides to purchase $100 million in bonds. Illustrate what this will do in the bond market. What has happened to bond prices and interest rates? What has this action by the Federal Reserve done to the deficit? 6. Now suppose that there is an increase in deficit spending of $100 million dollars (financed by issuing new Treasury bonds) and at the same time the Federal Reserve decides to purchase $100 million in bonds. Draw a diagram illustrating what has happened in the bond market. What has happened to equilibrium bond prices and interest rates? (This is a situation often referred to as monetizing the deficit....
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- Fall '07