Question

1. 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/increases/stays the same

-The supply of bonds...... decreases/increases/stays the same

-The equilibrium quantity..... rises/falls

-The equilibrium price...... rises/falls

-The equilibrium interest rate..... rises/falls

2. Consider the impact on the market for U.S. Treasury bonds when there is uncertainty about returns in the real estate market. What changes in the market for U.S. Treasury bonds? What happens to the equilibrium, price, quantity, and interest rate on U.S. Treasury bonds? SElect ALL that apply.

-Demand for U.S. Treasury bonds.... rises/falls

-Demand for U.S. Treasury bonds does not change

-Supply of U.S. Treasury bonds does not change

- Supply of U.S. Treasury bonds...... rises/falls

-Price...... increases/decreases

-Interest rate.... increases/decreases

-Quantity.... increases/decreases.

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.