Question

if downward revision of inflation is expected what do we know about the bond market? if...

if downward revision of inflation is expected what do we know about the bond market? if inflation decreases interest rates decrease if interest decreases price of bond increases bond demand increases mean price of bond increases so shift demand curve to the right what do we know about supply? also if supply moves more than demand quantity decreases if demand moves more than supply quantity increases. Please tell me if my assumptions are correct and what else I should know about the supply demand quantity price interest.

Homework Answers

Answer #1

PV of a bond, which is also the price of the bond in the secondary market is given as

PV = 50/(1+r) + 50/(1+r)2 + … + 50/(1+r)5 + 1,000/(1+r)5

When there is deflation, government reduces interest rates to encourage people to borrow and ensure there is more liquidity in the system. This leads to lowering of r in the above equation. As a result of this, the price of the bonds increase as the denominator goes down.

Thus deflation leads to increase in prices of bonds. So deflation is bullish for the Bonds Market.

If you found this helpful, please rate it so that I can have higher earnings at no extra cost to you. This will motivate me to write more.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory...
When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory of Money and According to fisher effect and Liquidity preference theory framework, which is MS=L * ( i , Y), we know that nominal interest rate goes up, which leads to an increase in money demand. My question is, by how much does the price level decreases and Money demand increases when MS falls? Do we have one for one relationship among them or...
Consider the impact on the market for U.S. Treasury bonds when there is uncertainty about returns...
Consider the impact on the market for U.S. Treasury bonds when there is uncertainty about returns on the U.S. stock 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 ___ Demand for U.S. Treasury bonds falls ___ Demand for U.S. Treasury bonds does not change ___ quantity increases ___ quantity decreases ___ Supply...
what do know about supply and demand? explain? what can you explain about economic models? what...
what do know about supply and demand? explain? what can you explain about economic models? what can you explain about surplus and shortage? what do you know about equilibrium? what do you understand about changes in quantity demanded versus demand? what do you understand changes in quantity supply and supply? what do you understand in normal goods versus inferior goods? what are your thoughts on quantity supplied, law demand, equilibrium, quantity demand?
8. Which policy is associated with time inconsistency? A. inflation targeting. B. the Taylor rule. C....
8. Which policy is associated with time inconsistency? A. inflation targeting. B. the Taylor rule. C. money growth rules. D. discretionary policy. E. the gold standard. 9. If real GDP is above potential (or natural level), then A. wage rates will eventually fall and the short-run aggregate supply curve will shift left. B. wage rates will eventually rise and the aggregate demand curve will shift left. C. wage rates will eventually rise and the short-run aggregate supply curve will shift...
If the inflation rate were about 4%, what action would monetary policy likely take and for...
If the inflation rate were about 4%, what action would monetary policy likely take and for what reason? increase the interest rate to decrease spending and put downward pressure on prices decrease the interest rate to increase spending and put upward pressure on prices increase the interest rate to increase spending and put upward pressure on prices decrease the interest rate to decrease spending and put downward pressure on prices In a recession that's caused by a negative SRAS shock...
1. The market for toasters is a competitive market. Suppose that the quantity of toasters supplied...
1. The market for toasters is a competitive market. Suppose that the quantity of toasters supplied per year depends as follows on the price of a toaster: Price (dollars per toaster) Quantity supplied (millions of toasters) 32 4.0 34 5.0 36 5.5 38 6.0 40 6.5 a. On a piece of graph paper, plot the supply curve for toasters. b. How does the quantity supplied of toasters change when the price changes? 2. The market for toasters is a competitive...
Next year, in response to a truly massive boom in business optimism, the Japanese Central Bank...
Next year, in response to a truly massive boom in business optimism, the Japanese Central Bank is concerned about the economy. (14pts) What kind of shock is Japan facing? _________________________________(positive or negative and supply or demand)? If the Central Bank instead chooses to act, they can ___________________ (increase/decrease) interest rates, which ___________________ (raises/lowers) the price of bonds. If they do so, the money supply curve___________________ (moves left/moves right/is unchanged) while the money demand curve ______________________ (moves left/moves right/is unchanged). As...
1.The Fed prefers to focus on the interest rate rather than growth in the money supply...
1.The Fed prefers to focus on the interest rate rather than growth in the money supply because a.it does not like to conduct open market operations. b.the money supply is too unpredictable. c.it makes inflation more predictable. d.money demand is too volatile. e.it is easier to fix the interest rate than maintain growth in the money supply. 2. Assume the Fed has complete control over the money supply. If the demand for money were greater than the supply of money,...
In the market for hot dogs, what happens when the price of beef goes up and...
In the market for hot dogs, what happens when the price of beef goes up and the price of hot dog buns goes up? [hot dogs are made of beef. Also, the term "hot dog" here refers to just the sausage. So you buy hot dogs at the store. And you also buy "hot dog buns" at the store. This gets confusing for some people, especially non-native English speakers] What happens to supply and demand in the market for hot...
(Tricky -- or at least hard.) Suppose we observe price and quantity both falling. What does...
(Tricky -- or at least hard.) Suppose we observe price and quantity both falling. What does that tell us about changes in demand and supply? A- Demand must have fallen and supply must have been unchanged. B- Demand must have fallen; supply may either have risen, fallen, orremained unchanged. C- Supply and demand must both have fallen. D- Supply must have fallen; demand must either have fallen or remained unchanged. If there is an increase in the overall level of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT