Answer to Question #137711 in Economics of Enterprise for rob

Question

Use demand and supply analysis to explain the effect in the bond market of a decrease in the federal deficit. What is the effect on the interest rate and bond price?

Answer 1

The Bond yields will fall and the bond prices rise when the Federal lowers interest rates. Prices rise because demand increases for unsettled bonds issued at higher interest rates,until when the yields on the old bonds compact the lower rates on the new bonds.