Suppose that in the bond market, there is an increase in the expected return on bonds...
Suppose that in the bond market, there is an increase in the expected return on bonds for investors, and an increase in the government's budget deficit. Then the result of these two changes will have what effect on the equilibrium price?
| push the price up |
| push the price down |
| it's impossible to tell which direction the price will go |
| none of the above |
Homework Answers
Answer- Push the price down
Explanation: Demand curve for the bonds due to increasing the expected return, will shift to the right, and the supply curve of the bonds will also shift to the right due to an increase in government's budget deficit. Thereby the new equilibrium price obtained would be lesser than the one which was prevailing earlier as the investors would now no longer be attracted to the bond due to the high risk carried by it now.
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