Question

Explain what will happen to the equilibrium price and equilibrium quantity of bonds in each of the following situations.​ (If it is uncertain in which direction either the equilibrium price or equilibrium quantity will​ change, explain​ why.)

Wealth in the economy increases at the same time that Congress raises the corporate income tax.

A.The demand curve will shift to the left and the supply curve will shift to the right. This decreases the price of bonds and the quantity of bonds is indeterminate.

B.Both the demand curve and the supply curve will shift to the left. This decreases the price of bonds and the quantity of bonds is indeterminate.

C.The demand curve will shift to the right and the supply curve will shift to the left. This increases the price of bonds and the quantity of bonds is indeterminate.

D.Both the demand curve and the supply curve will shift to the right. This increases the price of bonds and the quantity of bonds is indeterminate.

The economy experiences a business cycle expansion.

A.The demand for bonds shifts to the​ right, raising price and increasing the quantity of bonds.

B.The supply for bonds shifts to the​ right, lowering price and increasing the quantity of bonds.

C.The supply for bonds shifts to the​ left, raising price and decreasing the quantity of bonds.

D.The demand for bonds shifts to the​ left, lowering price and decreasing the quantity of bonds.

The expected rate of inflation increases.

A.Both the supply of bonds and the demand for bonds shift to the right. This increases the quantity of bonds and the price is indeterminate.

B.The supply of bonds shifts to the left and the demand for bonds shifts to the right. This increasses the quantity of bonds and the price of bonds is indeterminate.

C.The supply of bonds shifts to the right and the demand for bonds shifts to the left. This decreases the price of bonds and the quantity of bonds is indeterminate.

D.Both the supply of bonds and the demand for bonds shift to the left. This increases the quantity of bonds and the price is indeterminate.

The federal government runs a budget deficit.

A.The supply of bonds​ decreases, shifting the supply curve to the​ left, thus forcing the price up and the quantity down.

B.The supply of bonds​ increases, shifting the supply curve to the​ right, thus forcing the price down and the quantity up.  

C.The demand for bonds​ increases, shifting the demand curve to the​ right, thus forcing the price and quantity up.

D.The demand for bonds​ decreases, shifting the demand curve to the​ left, thus forcing the price and quantity down.

Answer 1

Ans 1. Option c

The increase in wealth leads to increase in demand for bonds in the market shifting the demand curve to the right and an increase in corporate tax leads makes it less profitable for the firms to invest, so, supply of bonds decreases. This leads to decrease in price of bonds but quantity change will depend on the relative size of decrease of supply and increase of demand if former is more then quantity will decrease but if the latter is more then the quantity will increase.

Ans 2. Option b

A business cycle expansion increase the profitability on investments, so, more funds are needed, thus, increasing supply of bonds increasing the equilibrium quantity and decrease the price of bonds.

Ans 3. Option c

An increase in expected inflation leads to decrease in real interest rate, so, it leads to decrease in demand for bonds but increase in supply of bonds, thus, decreasing price of bonds but the quantity of bonds depends on the relative size of decrease of demand and increase of supply.

Ans 4. Option b

Increase in budget deficit leads makes the government to issue bonds which increases the supply of bonds leading to an increase in quantity of bonds and decrease in price of bonds.

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