Question

using the bond market model(and the portfolio choice theory if needed),analyze the effect of each of...

using the bond market model(and the portfolio choice theory if needed),analyze the effect of each of the following events on interest rates on bonds (in the US for part c) if possible draw graphs

a) a decrease in expected inflation

b)an increase in the federal government budge deficit

c)an increase in interest rate in Europe

d)an economic boom (expansion)

Homework Answers

Answer #1

a) a decrease in expected inflation: when quantity supplied is greater than quantity demand . The business and government will want to sell more bonds because the price bond is high investors don't want to buy thesr bonds because the price is too high and interest rate are too low.

b) the federal government incurs a deficit when it's total outgoing payment exceed the total money it collects if instead federal revenue are greater than outlays then the federal government generates a surplus .

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