Question

A struggling economy is not producing like a strong economy: there is less investment, less job creation, stagnant wages, perhaps increasing unemployment. For the government debt, the lower interest rates mean that the government does not have to pay out as much in interest payments to the holders of the debt. This means the debt is "cheaper" than the same debt at a higher interest rate. This might lead you to think that this means that it can be paid off faster. However, if the economy is struggling then the tax base is likely smaller, which means that the government will take in less money in tax revenues. Depending on the change in tax revenues, this could lead to the need for even more borrowing.

In thinking about this, do government bonds act like "normal" bonds in that they have an inverse relationship between price of the bond and interest rate? If so, then low interest rates would make the bond debt increase?

Answer 1

Yes,government Bond and interest rate will also be having inverse relationship because when the interest rates are going up,the Government bond prices will be going down because it can be reflected into the 10 year treasury bonds or 30 year treasury bonds in which and the interest rates keeps on going up the bond prices falls.

so it can be said that there is an inverse relationship with the existing between the bond prices and the interest rate. if the interest rates are going up, the government Bond prices will be going down and if the interest rates are going down government Bond prices will be going up.

when there would be lower interest rate, it cannot be directly derived that borrowing should be higher because when the incomes should be lower, the creditworthiness of borrowers should also be lower so institutions will not be wanting to lend to those individuals whose credit worthiness is low so it can be said that the bond debt will not be increasing as it would have been in a inflationary situation because the income is lower and the creditworthiness will also be lower.