Question

If the federal government reduces deficit spending, which is true (choose the most correct)?

Group of answer choices

Bond yields eventually fall

Bond prices should eventually decrease

Investment spending should eventually increase

The price of corporate debt should eventually increase

Two of these answers.

Three of these answers.

All of these answers.

Answer 1

Three of the above statements are true, i.e; the bond yields decreases , the investment spending increases and the prices of corporate debt increases.

Reducing Deficit spending implies there is an improvement in the difference between govt revenue and expenses. If there are lower deficits, the interest rates fall ( bond yeilds fall) as there is less risk of default. Since, the money supply has increased the govt. Uses less of the private sector savings, thereby increasing the pvt sector investments. When default risk reduces, the corporate debt riskiness reduces as well.

Lower interest rates , will cause the bond prices to rise.

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