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What would happen to demand for government bonds if the gold market becomes more volatile (and...

What would happen to demand for government bonds if the gold market becomes more volatile (and hence, riskier)? Explain you answer in the context of asset demand theory.

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Answer #1

If the gold market becomes more volatile and risky, people will no longer invest in gold. They would be unwilling to block their money in a riskier investment.

Government bonds are much secure and give good interest. The demand for govt bonds will slowly rise. Thus the price of govt bond will also rise but the interest rate on them will start to fall. We know there is an inverse relation between price and interest rate of a bond. So as price increases interest rate on the bond will start to fall

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