If the economy slows down (as what is predicted by some people in 2020 or 2021),...
If the economy slows down (as what is predicted by some people in 2020 or 2021), what would we expect to see in the demand and supply model for bonds? Discuss both demand and supply and new equilibrium price and quantity for bonds in order to get full credit.
Homework Answers
During recession or economic slowdown, the interest rate falls - hence, the price of bonds increases (because bond prices and interest rates are inversely related). This causes the supply of bonds to shift to the left.
Slowdown also decreases people's wealth, and hence a decrease in the demand for bonds. It will shift the demand curve for bonds to shift leftward.
As shown in the figure, the new equilibrium price of bonds increases while the quantity of bonds decreases when the economy slows down.
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