The above graph shows the supply and demand functions for a one-year Treasury discount bond with a face value of F = $1,150. Suppose that currently the Treasury department is not participating in this market. At this point $40 million worth of these bonds are traded in the market by the private sector (firms and households). These bonds have been issued in the past by the U.S. Treasury to finance past budget deficits. The equilibrium interest rate on this bond is 9.52 percent. The government starts running budget deficits and to finance these deficits the U.S. Treasury borrows $60 million through selling new issues of these bonds. Assume that the quantities of bonds issued and sold by the Treasury do not depend on the interest rate. As a result the interest rate increases to 15.00 percent and the private sector borrowing decreases by 1050.00 1000.00 million dollars. millions dollars to

The above graph shows the supply and demand functions for a one-year Treasury discount bond with a face value of F = $1,150. Suppose that currently the Treasury department is not participating in this market. At this point $40 million worth of these bonds are traded in the market by the private sector (firms and households). These bonds have been issued in the past by the U.S. Treasury to finance past budget deficits. The equilibrium interest rate on this bond is 9.52 percent. The government starts running budget deficits and to finance these deficits the U.S. Treasury borrows $60 million through selling new issues of these bonds. Assume that the quantities of bonds issued and sold by the Treasury do not depend on the interest rate. As a result the interest rate increases to 15.00 percent and the private sector borrowing decreases by 1050.00 1000.00 million dollars. millions dollars to

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Inflationary expectations in the economy increase rapidly, evoking a much stronger response from issuers of bonds than lenders of bonds. Using the model of supply and demand for bonds, illustrate and explain the impact of this increase in inflationary expectation on equilibrium bond price and interest rate.
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E3 The demand curve and supply curve for one-year discount bonds were estimated using the following equations: Bd Price=-2/5Quantity+990 Bs Price=Quantity+500 As the stock market continued to rise, the Federal Reserve felt the need to increase the interest rates. As a result, the new market interest rate increased to 19.65%, but the equilibrium quantity remained unchanged. What are the new demand and supply equations? Assume parallel shifts in the equations
Inflationary expectations in the economy increase rapidly, evoking a much stronger response from issuers of bonds than borrowers of bonds. Using the model of supply and demand for bonds, illustrate and explain the impact of this increase in inflationary expectation on equilibrium bond price and interest rate.