Question

Draw the Bond market. Be sure to label everything. Show what happens before and after bond issuers become more risky. 79. 80. 81. 82. Borrowing? ____________ 83. Interest Rates? ____________ 84. Lending? ____________ Draw the Bond market. Be sure to label everything. Show what happens before and after a consumers have a decrease in the desire to consume. 85. 86. 87. 88. Borrowing? ____________ 89. Interest Rates? ____________ 90. Lending? ____________

Answer 1

In each graph, D0 and S0 are initial bond demand and supply curves, intersecting at point A with initial price P0 and quantity of bonds Q0.

(1)

After bond issuers become more risky, demand for bond falls (as investors fear higher risk of default). Lower bond demand shifts bond demand curve to left, decreasing both price and quantity of bonds. As bond price and interest rate are inversely related, lower bond price increases interest rate.

Borrowing - Decreases

Interest rate - Increases

Lending - Decreases

In following graph, as D0 shifts left to D1, it intersects S0 at point B with lower price P1 and lower quantity Q1.

(2)

Decrease in desire to consume will increase saving, which will increase the demand for bonds among public. Higher bond demand shifts bond demand curve to right, increasing both price and quantity of bonds. As bond price and interest rate are inversely related, higher bond price decreases interest rate.

Borrowing - Increases

Interest rate - Decreases

Lending - Increases

In following graph, as D0 shifts right to D1, it intersects S0 at point B with higher price P1 and higher quantity Q1.