Use our model of the bond market (supply and demand) to explain what happens if the U.S. economy continues to grow at robust rates.
What will be an ideal response?
Growth in the economy should result in greater supply of bonds, the bond supply curve shifting right, as more firms seek resources to finance expansion and inventories. The increase in supply by itself would result in lower bond prices and higher interest rates. From the demand side, the robust economy should also cause an increase in wealth. The increases in wealth would cause bond demand to increase (the curve shifts right), which would drive up bond prices and decrease interest rates. The net effect will be determined by which shift is larger. If supply shifts by an amount greater than demand, the bond prices will fall and yields will rise. On the other hand, if demand increases by more than supply, the bond prices will rise and yields will fall.
You might also like to view...
The utility maximizing consumption bundle for an individual can be found by locating _____
a. the individual's bliss point b. any point on an indifference curve touching the budget constraint c. the highest point on an individual's indifference curve d. the point tangent to an individual's budget constraint
The chairman of the Federal Reserve Board of Governors:
A. Is elected by U.S. voters. B. Will typically change following each presidential election. C. Serves a four-year term and can be reappointed. D. Is always closely tied to the same political party as the president.
The demand for a normal good is
A. related to the supply of the good. B. directly related to income. C. unaffected by changes in consumer tastes and preferences. D. unaffected by changes in the prices of complementary goods.
Consider a consumer who consumes only 
and 
. The price of 
falls.
a. On a graph
with 
on the horizontal and 
on the vertical axis, illustrate the change in this consumer's budget constraint assuming exogenous income I.
b. Illustrate income and substitution effects for 
assuming that both goods are normal.
c. Can you tell whether the cross-price demand curve for 
is upward or downward sloping?
d. Suppose 
is leisure hours and 
is a composite consumption good. Consider an increase in the wage assuming a fixed endowment of leisure (and no exogenous source of income). How is your graph similar and how is it different from what you graphed in (a) through (c)?
e. Is the leisure-demand curve a cross-price demand curve? Why or why not?
What will be an ideal response?