000o T-Mobile LTE 11:08 PM 63% bbprod.stjohns.edu A journalist explaining the co
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000o T-Mobile LTE 11:08 PM 63% bbprod.stjohns.edu A journalist explaining the complex interactions between various markets in the economy to his daughter, who is in high school said: "when the government spends more than it collects in tax revenues. it must sell bonds to finance its excess expenditures. But selling new government bonds drives interest rates down and thus stimulates the economy by encouraging more investment and decreasing the foreign exchange rate, which helps our export industries." You overheard this statement. Do you agree or not; and why? One word answer is not enoughExplanation / Answer
Interest rates are negatively correlated with bond prices due to opportunity cost. Thus, central banks can indirectly affect bond prices through the purchase or sale of debt securities on the open market.
When interest rates go up, existing bonds bearing the old coupon rates are no longer as valuable as new bonds with the higher coupon rate. In the open market, the price of lower-interest bonds must fall so that expected return is equal for all comparable bonds.
Changes in interest rates affect the public's demand for goods and services and, thus, aggregate investment spending. A decrease in interest rates lowers the cost of borrowing, which encourages businesses to increase investment spending
Lower interest rates tend to be unattractive for foreign investment and decrease the currency's exchange as the demand for the country’s currency will go down. When the rate of exchange of a country’s currency falls the goods of the country become cheaper in foreign markets thus boosting exports.
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