Question

Using the graphs of demand and supply of bonds, explain what happens when there is a large federal government deficit. Draw the graphs and explain.

Answer 1

When there is a large federal government deficit,Fed sells bonds to the public which increases the supply of bonds.Government often issues bonds to finance deficit.This increase in the supply of bonds shifts the supply curve of bonds to the right.Due to increase in the supply of bonds,price decreases and interest rate increases.