Question

In: Economics

In the late 1990s, the U.S. government ran a surplus for the first time in decades....

In the late 1990s, the U.S. government ran a surplus for the first time in decades. It instituted a buyback program, whereby the Treasury bought outstanding government bonds. How would this program affect the bond market price, yield, and quantity of bonds? How might it affect the liquidity of government bonds?

Solutions

Expert Solution

The primary question here is, why do the government buyback bonds and securities? It is done to reduce the long term borrowing rate/ interest rate. By doing so it will increase Investment (I) and Domestic Consumption(C), since loans are available at lower rates, and borrowing costs are lowered.

The bond prices in turn will increase, as bond prices are inversely related to interest rates. Due to a higher bond price, people will sell their bonds and this will increase liquidity in the market. Bond Yield is the return a person earns on the bonds invested in. As the interest rate lowers, and bond prices increase, the return earned, or bond yields will reduce.

Also since banks provide a lesser interest rate on savings people prefer not to keep a huge sum in the banks, encouraging them to spend this money on goods and services, stimulating demand and creating jobs.

The buyback move is often initiated to increase liquidity in the market- it has the same effect as increasing the money supply in the market.


Related Solutions

use the graphical tools, along with a “story.” A. The federal government ran a budget surplus...
use the graphical tools, along with a “story.” A. The federal government ran a budget surplus in the late 1990 and in the year 2000, but has since returned to running a budget deficit. 1. Explain why reducing the budget deficit can cause short-term pain in the form of lower employment, higher unemployment, and a recession. 2. Explain why expansionary monetary policy would help decrease the likelihood of a recession if it were adopted at the same time the budget...
In the late 1990s and early 2000s, there was an explosion in the issuance of bonds...
In the late 1990s and early 2000s, there was an explosion in the issuance of bonds backed by mortgages, also known as mortgage-backed securities (MBSs). The underlying cause of the financial crisis was a combination of debt and mortgage-backed assets. True or False Credit Default Swaps are a kind of insurance on bonds. True or False In 1999 the Depression-era Glass-Steagall Act (1933) was partially repealed, allowing banks, securities firms, and insurance companies to enter each other’s markets and to...
Until the early 1990s, the U.S. government emphasized GNP rather than GDP as the fundamental measure...
Until the early 1990s, the U.S. government emphasized GNP rather than GDP as the fundamental measure of economic well-being. Which measure should the government prefer if it cares most about the total income of Americans? Which measure should it prefer if it cares most about the total amount of economic activity occurring in the United States?
As per a published report…” In the late 1990s and early 2000s, Nokia was the global...
As per a published report…” In the late 1990s and early 2000s, Nokia was the global leader in mobile phones. With the arrival of the Internet, other mobile companies started understanding how data, not voice, was the future of communication. Nokia didn’t grasp the concept of software and kept focusing on hardware because the management feared to alienate current users if they changed too much.” List and briefly explain 2 factors that might have been overlooked by the business(es), referred...
As per a published report…” In the late 1990s and early 2000s, Nokia was the global...
As per a published report…” In the late 1990s and early 2000s, Nokia was the global leader in mobile phones. With the arrival of the Internet, other mobile companies started understanding how data, not voice, was the future of communication. Nokia didn’t grasp the concept of software and kept focusing on hardware because the management feared to alienate current users if they changed too much.” List and briefly explain 2 factors that might have been overlooked by the business(es), referred...
As per a published report…” In the late 1990s and early 2000s, Nokia was the global...
As per a published report…” In the late 1990s and early 2000s, Nokia was the global leader in mobile phones. With the arrival of the Internet, other mobile companies started understanding how data, not voice, was the future of communication. Nokia didn’t grasp the concept of software and kept focusing on hardware because the management feared to alienate current users if they changed too much.” List and briefly explain 2 factors that might have been overlooked by the business(es), referred...
HAIER’s foray into International Markets : In the late 1990s, the Haier group (Haier) was the...
HAIER’s foray into International Markets : In the late 1990s, the Haier group (Haier) was the leader in the Chinese consumer appliances market (with a 39.7%, 50% and 37.1% market share in refrigerators, air-conditioners and washing machines respectively in December 1998). But deflation in the Chinese economy slowed sales. ut deflation in the Chinese economy slowed sales growth from 50% in 1998 to around 30% in 1999. Haier decided to look for new markets. Since the US had a large...
In the late 1990s, the euro depreciated 15 percent against the dollar. As a result, European:...
In the late 1990s, the euro depreciated 15 percent against the dollar. As a result, European: A. exports rose, boosting the economy. B. imports rose, boosting the economy. C. exports declined, dragging down the economy. D. imports declined, dragging down the economy.
What was the business environment of enron during the late 1990s and early 2000s? And, how...
What was the business environment of enron during the late 1990s and early 2000s? And, how did this environment incentive the numerous frauds that happened during this period?
Russia and South Korea experienced exchange rate crises in the late 1990s, but their response was...
Russia and South Korea experienced exchange rate crises in the late 1990s, but their response was markedly different. First, Russia experienced a dramatic decrease in the value of the Russian ruble relative to the U.S. dollar in 1998. The Russian government responded by suspending payments on foreign debt. Similarly, South Korea experienced a decrease in the value of the won in 1997. In contrast, South Korea did not default on its debt. Why might these two countries have behaved differently...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT