Question

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates? a. Prices and interest rates would both decline. b. Prices would decline and interest rates would rise. c. Prices would rise and interest rates would decline. d. Prices and interest rates would both rise. e. There would be no changes in either prices or interest rates.

Answer 1

When the Federal reserve issues $50 billion of new bonds,
$50 billion of cash is removed from the economy in exchange for
bonds.
When cash is removed from the economy interest rates rise. In other
words, the cost of borrowing increases. In addition, the interest
rate on savings deposits increases.
When interest rates rise the demand for bonds decreases.
When the demand for bonds decreases, bond yields rise and
bond prices fall.
b. Prices would decline and interest rates would rise.