a.Graphically illustrate a decrease in expected profitability on the bond model (i.e. from a recession). Explain...

a.Graphically illustrate a decrease in expected profitability on the bond model (i.e. from a recession). Explain the model. b. Graphically illustrate an increase in the expansion of the business cycle using the bond model. Explain the model and the process. (two linked graphs)

Expert Solution

a. A decrease in the expected profitability due to recession will reduce the demand for bonds in the bond market because overall income in the economy decreases. The intial equilibrium in the bond market occurs at point E1. A decrease in expected profitability will shift the bond demand curve leftwards leading to decrease in the price of bond and quantity of bonds in the bond market. This can be depicted in the diagram as:

b. An increase in the expansion of the business cycle will increase income in the economy and this also increases savings in the economy. This will shift the bond supply curve rightwards in the bond market. On the supply side, expansion in the business cycle will also increase supply of bonds in the bond market and bond supply curve will shift rightwards as producers will increase supplu to fund their production. At the new equilibrium level, equilibrium quantity of bonds increases and impact on price is ambigious as it depends on the magnitude of the shift of demand and supply curve in the bond market.

Rahul Sunny answered 1 year ago

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