Multiple choice: Which one is correct? Use the model of supply and demand for bo

Question

Multiple choice:

Which one is correct?

Use the model of supply and demand for bonds to determine the impact of expectations that the real estate market is going to weaken on bond prices and quantity. Bond Supply increases, equilibrium price decreases and equilibrium quantity increases Bond Demand increases, equilibrium price increases and equilibrium quantity increases Bond Supply decreases, equilibrium price increases and equilibrium quantity decreases Bond Demand decreases, equilibrium price decreases and equilibrium quantity decreases

Explanation / Answer

Answer: Bond Demand increases, equilibrium price increases and equlibrium quantity increases

Reason: If we are expecting weakness in the real estate market it implies an increase in the relative return on bonds due to which the demand for bonds shifts to the right resulting in increase in the demand for bonds and resulting in increase in the equlibrium quantity.

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