Stories appear in the financial press reporting two economic developments: Wealt

Question

Stories appear in the financial press reporting two economic developments: Wealth levels in the United States are increasing, while at the same time relative riskiness of bonds issued by American corporations is decreasing. Explain in words and show graphically what will happen in the US bond market because of these two events. Stories appear in the financial press reporting two economic developments: Wealth levels in the United States are increasing, while at the same time relative riskiness of bonds issued by American corporations is decreasing. Explain in words and show graphically what will happen in the US bond market because of these two events.

Explanation / Answer

When the wealth of the bond increases the welath of the sociert increases, to think about it think in terms of houselhold and savings. If savings increases so does tey will look for investment opportunities and hence higher the damdn for bonds

As the relaive riskines of the bond decreases savers would like to buy more bonds as risk has decreased

Hence there would be tremndous increase indemand for bonds due to which there price will increase and yields would fall

Weh quanity demanded is large than the quanity supplieed there is bond shortage which can be only ber erased if seeler are willing to offer there bonds at higher prices and realize capital gain

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