2) Match the factor affecting the demand or supply of bonds with the effect pred
ID: 1161585 • Letter: 2
Question
2) Match the factor affecting the demand or supply of bonds with the effect predicted by the textbook. (7pts) interest rates are expected to increase in the near future the average return on stocks increases relative to the return on bonds the stock market becomes more volatile relative to the bond market v Select One a decrease in the demand for bonds an increase in the demand for bonds a decrease in the demand for bonds a decrease in the demand for bonds an increase in the supply of bonds an increase in the demand for bonds an increase in the supply of bonds a decrease in the supply of bonds a decrease in the supply of bonds Select One the government's budget deficit increases wealth increases a tax on bond market transactions decreases the perceived liquidity of bonds business conditions deteriorate as the economy enters a recession Select OneExplanation / Answer
Answer 2;
a. A decrease in the demand for bonds. Increase in expected interest rates will reduce the price of bonds and thus demand curve will shift leftwards.
b. This will shift the demand curve of bonds leftwards as demand for bonds will decline.A decrease in demand for bonds
c. This will make investment in bonds safer and thus demand curve for bonds will shift rightwards.An increase in demand for bonds
d. An increase in the supply of bonds. This will increase government borrowing and thus shift the supply curve of bonds rightwards.
e. Increase in wealth will increase the demand for bonds.
f. A decrease in the perceived liquidity will decrease the demand for bonds.
g. This will reduce borrowing by the firms and thus shift the supply curve of bonds leftwards.
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