Question

If business regulatory costs are substantially reduced, using the supply and demand curves for bonds, we can expect the equilibrium price of bonds to _______________ and the equilibrium quantity of bonds issued to _______________. Group of answer choices

increase; increase

increase; decrease

increase; can't tell

decrease; increase

decrease; decrease

decrease; can't tell

Answer 1

The real interest rate is determined by the intersection of the loanable fund demand and supply curve. The demand curve of the loanable fund is downward sloping and supply curve is upward sloping.

The given initial equilibrium interest rate is i* and quantity Q*. But when business regulatory costs are substantially reduced, then the demand for loanable fund increases by the firms because it is profitable to invest more. This is because the cost of production has reduced. Hence the demand curve for the loanable fund shifts rightward from D to D1, so the equilibrium interest rate of bonds increases from i to i1 and equilibrium quantity of bonds also increases from Q* to Q1.

All this has been shown in the below diagram.

Hence it can be expected that the equilibrium price of bonds to increase and the equilibrium quantity of bonds issued to increase.

Hence option first is the correct answer.