Question

2) The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result

A) the supply curve for bonds shifts to the right.

B) the demand curve for loanable funds shifts to the left.

C) the equilibrium interest rate falls.

D) the equilibrium price of bonds rises.

Answer: A

7) As a result of higher expected inflation

A) the demand and supply curves for bonds both shift to the right and the equilibrium interest rate usually rises.

B) the demand and supply curves for bonds both shift to the left and the equilibrium interest rate usually falls.

C) the demand curve for bonds shifts to the right, the supply curve for bonds shifts to the left, and the equilibrium interest rate usually rises.

D) the demand curve for bonds shifts to the left, the supply curve for bonds shifts to the right, and the equilibrium interest rate usually rises.

Answer: C

These two questions are both about higher inflation, but why the supply curve in the first question shift to right and in second question shift to left??? that's contradictory.....

Answer 1

1.

The Federal Reserve's report indicating that future inflation will be higher than had previously seemed likely and as a result the supply curve for bonds shifts to the right.

Let us first understand why does this take place.

Because of the Fed's report that future inflation is likely to be higher than expected, markets would expect the Fed to take action to bring down inflation. Fed can bring down inflation rate by issuing bonds in the market so that some of the money from market is withdrawn. This is the reason why the supply curve of bonds ( as bonds are supplied in the market by Fed ) will shift to the right to bring down inflation.

2.

As a result of higher expected inflation the demand curve for bonds shifts to the right. Bonds are demanded by investors expecting higher interest rate earnings. Increased demand for bonds shifts its demand curve to the right.

Now, the demand for the bonds issued by the Fed is always higher than the supply for it.

Higher demand for bonds may crowd out the funds in the market and that is why the Fed may decide to reduce the supply of bonds to bring down the equilibrium interest rate which might have gone up due to higher demand for bonds and crowding out of private money.

answered by: anonymous