Suppose the U.S. government enacts an across-the-board increasein the income tax rates. Everything else held...

Suppose the U.S. government enacts an across-the-board increase in the income tax rates. Everything else held constant, this would cause the yields on U.S. Treasury bonds to_______ and the demand for municipal bonds to________.

increase; decrease

decrease; decrease

decrease; increase

increase; increase

Solutions

Expert Solution

Correct Option - 1st Option - increase,decrease

When income tax are increased , it causes the interest rate of muncipal bonds to decrease because the demand of these bond increase as it works to help in tax exemption . hence the amount of yield decreases.

The U.S treasury bonds is considered to be default risk free , and it is default risk because the govt. is able to print money and increase taxes , thatswhy the yield increases , when income tax are raised.

Rahul Sunny answered 1 year ago

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