Question

1. Show the effect of people becoming more patient in the BOND MARKET. (Note: this is not the same as the loanable funds market.....Well, it kind of IS the same market, but it's not the same graph! Come on man, just think about it....)

Answer 1

As people become more patient, they will start to save more and consume less amount of income and their preference for future consumption will increase. As savings of people will increase, the demand for bonds will increase in the bond market.The initial equilibrium in the bond market occurs at point E1. An increase in demand for bonds will shift the bond demand curve rightwards to Bd' and new equilibrium in the bond market occurs at point E2 where price of bonds has increased and equilibrium quantity of bonds has increased in the bond market. An increase in the price of bonds will reduce yield of bonds in the bond market.