question archive Suppose that discount brokers make bonds more liquid
Subject:EconomicsPrice:2.88 Bought3
Suppose that discount brokers make bonds more liquid.
What should the central bank do if it doesn't want the interest rate to change? Explain.
The higher liquidity on the bond signifies the lesser interest rate. To increase the interest rate back to the nominal rate the central bank tries to curb the money supply in the market. The government can reduce the money supply by selling the government bonds in the open market thus, bringing back the money from the market and reducing the supply in the market and increasing the interest rate back to nominal rates.