Question

Suppose the Fed announces that interest rates will continue to rise in 2018. How would this impact the market for bonds? Would it impact demand or supply? Would it cause an increase or decrease? How would it impact the equilibrium quantity, price and interest rate? Select all that apply.

___ The demand for bonds decreases.

___ The demand for bonds increases.

___ The demand for bonds stays the same.

___ The supply of bonds decreases.

___ The supply of bonds increases.

___ The supply of bonds stays the same.

___ The equilibrium quantity rises.

___ The equilibrium quantity falls.

___ The equilibrium price rises.

___ The equilibrium price falls.

___ The equilibrium interest rate rises.

___ The equilibrium interest rate falls.

Answer 1

(1) If interest rate continues to increase, demand for bonds will increase, but supply will remain unchanged. Equilibrium price rises, quantity rises and interest rate falls (Since bond price is inversely related to interest rate).

(2) If return on real estate is uncertain, investors will demand more of treasure securities where returns are certain. Demand for treasury bonds rises, Supply does not change, price increases, interest rate decreases and quantity increases.