Question

Using the Fisher Effect, as covered in the video lectures, please explain how a decrease in interest rates may result in an decrease in the Quantity of Bonds. Please explain how it may result in an increase in the supply of bonds. You are required to use a figure, with the axes properly labeled, to display this impact in both cases. (10 Points)

Answer 1

Hi

The answer of the following question are as follows:

So now we can say that the Bond prices decrease as the interest rates increases. On the other hand, bond prices increase as the interest rates decline. That is because investors will achieve a higher return rate elsewhere as the interest rates increase, and so the original bond prices adjust downwards to the new rate of return.
Let us take a example for better explanation likewise if we take interest rate on X axis and Bond price on Y axis. Graph looks like the above one

I hope I have served the purpose well.

Thanks.