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Use the bond supply and bond demand curves to show the impact of a decrease in...

Use the bond supply and bond demand curves to show the impact of a decrease in wealth on bond prices and market interest rate. You need to show the work you do on your graph, including the original bond price and the price after the decrease in wealth. If you do a curve shift, you need to explain the reason for the shift.

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A decrease in wealth will decrease the savings of the households. So, the demand for bonds will decrease, shifting the bond demand curve leftwards from D to D'. This will lead to a surplus of bonds in the market at given price, P'. So, the price of the bond starts decreasing leading to an increase in quantity demanded and decrease in quantity supplied of bonds. This moves the equilibrium to a lower equilibrium quantity of bonds, Q' and a lower price of bonds, P'.
We know that the price of the bonds and the market interest rates are negatively related, so, a decrease in price of bonds leads to an increase in interest rate.

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