For each of the following situations, explain whether the demand curve for bonds
ID: 1193378 • Letter: F
Question
For each of the following situations, explain whether the demand curve for bonds, the supply curve for bonds, or both would shift. Be sure to indicate whether the curve(s) would shift to the right or to the left. What would be the effect on the equilibrium bond price and equilibrium quantity of bonds in each of these cases? Draw (a) diagram(s) in each case to explain your answer.
Investors believe that the level of risk in the stock market has declined.
The federal government imposes a tax of $ 10 per bond on bond sales and bond purchases.
The economy experiences a period of rapid growth, with rising corporate profits.
Explanation / Answer
Investors believe that the level of risk in the stock market has declined.
With a decline in the risk of the stock market, demand for bonds will rise, shifting the demand curve to the right. This will result in increase in the price and quantity traded of bonds.
The federal government imposes a tax of $10 per bond on bond sales and bond purchases.
Demand and supply of bonds will decrease by the same amount. As a result, both demand and supply curves will shift to the left. As a result, price will remain unchanged, but quantity traded will fall.
The economy experiences a period of rapid growth, with rising corporate profits.
This will lead to increase in the demand for corporate bonds, thereby shifting the demand curve to the right. This will lead to an increase in the price and quantity traded of bonds.
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