Question

Using the appropriate supply and demand diagrams, show why market interest rates are rising when the economy is expanding. Additionally, explain how the spread between default-free debt and default-risky debt vary over the course of the business cycle.

Answer 1

When the economy is in boom the demand increases income raises and supply also increases. SO there will be shift in supply to the right. where as the demand curve there will less shift than supply curve. During recession period the the demand and supply curves moves towrds left. So during boom there will be increase in intrest rates and price fall while in recession prices will increase and intrest rate decreases.