What will happen to the supply and demand curve of the bond market if actions by...

What will happen to the supply and demand curve of the bond market if actions by the Fed create widespread belief among investors that inflation will decrease significantly?

Solutions

Expert Solution

If there is a widespread belief among the Investor that the inflation will decrease significantly, then the investor will plan to buy bonds in the future , instead of today i.e ) they will purposefully delay their purchase., from seller point of view they would sells if off immediately as their expecting the price to fall in future, as a result Supply increases.

Scenario 1

During inflation, the prices of Bonds will be higher, if the investor expect the inflation to decrease significantly in future, the investor would not buy the bonds today, they would buy in future only, when the prices are lower. As a result the demand for Bonds falls and thus results in the fall of Bond price. The demand curve DD shift to DD1( shifts leftwards)

Scenario 2

Also, another investor action , for the investor who already has bought Bonds would want to sell off the Bonds immediately , since the prices are expected to fall in the future. As a result Supply increases, which would also result in fall in prices of the bonds.Supply curve shifts from SS to SS 1( shifts rightwards)

Memo No_ Date 05 ria kall s kom P. to 3 brium pointisstalluhb

Rahul Sunny answered 1 year ago

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