Explain how the sales of government bonds by the Reserve Bank can result in decreased availability of liquidity and higher interest rates.

The sale of government bonds by the reserve bank is a monetary policy tool. Other monetary tools that regulate money supply are;

a) Discount rate- the rate at which the central bank lends money to banks.

b) Reserve requirements- the minimum balance banks are required to save with the central bank.

c) Interest on reserves- the interest depositor's gain on banked funds and those paid by borrowers for loans.

In periods such as boom when the level of the money supply is high and that of interest rates is low, the government can float various types of bonds such as infrastructure bonds increasing their supply in the market. Through these transactions, individuals exchange their liquid cash in hand or deposited at the bank for bonds decreasing the amount of money in circulation. The sale of government bonds by the reserve bank pushes the prices of bonds down leading to high-interest rates because of the opposite relationship between bond prices and the interest rates. A fall in bond prices leads to high- interest rates in the market and decreased liquidity.