Question

4. State whether each of the following will shift the supply curve or demand curve for bonds, or both, and in which direction.

a. State and local governments increase taxes to reduce their deficits.

b. The real estate market is expected to strengthen.

c. Business confidence increases.

d. Computerized trading makes buying and selling bonds easier.

e. Inflation is expected to increase.

Answer 1

Let me answer the question one by one.

a) An increase in taxes on the side of state and local governments will affect demand and supply. Both the demand and supply curves will shift inwards or leftwards indicating an increase in price of the products and less demand for such products.

b) In this case, the demand curve will shift to the right and the supply curve will remain the same.

c) In this case, there will be a rightward shift in the supply curve with no change in demand curve as it will lead to increase in supply of products.

d) In the given case, both the demand and supply curves will shift to the right as there is a favourable advancement in technology which makes it easy to perform the work.

e) In this situation, the demand curve will shift to the left and the supply curve will shift to the right as investors demand a higher interest rate for their investment as compensation for their lost value while other things being equal. Demand for bonds will falls, bond prices falls, and interest rates will rise and higher inflation will make them more willing to borrow money. Supply should and will increase, bond prices will fall, and interest rates will increase.