Question

#1 If the demand for bonds shifts to the left, the price of bonds

A.decreases, and interest rates fall.

B.increases, and interest rates rise.

C.decreases, and interest rates rise.

D.increases, and interest rates fall.

#2 If the supply of bonds shifts to the right, the price of bonds ____(A. remains the same B.increases C. decreases), and the interest rate ____(A. decreases B.remains the same C. increases)

Answer 1

1 option C

• If the Interest rates rise, the bond prices fall. This will lead to a decrease in quantity demanded
• Thus causing the bond to shift to the left.
• Conversely we can say that if the interest rate is decreasing, the bond prices rise which will in turn increase the quantity demanded.

2. Option C

• The supply curve shifts due to changes in government budget, expected profit from investments.
• When the bond prices are low , the interest rates are higher when all others are held constant.
• At this point the quantity supplied of bonds is lower. This shows that there is a positive relationship between prices and quantity supplied.