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29 November, 09:24

Suppose the U. S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

Select one:

a. Prices and interest rates would both decline.

b. There would be no changes in either prices or interest rates.

c. Prices would rise and interest rates would decline.

d. Prices and interest rates would both rise.

e. Prices would decline and interest rates would rise.

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Answers (1)
  1. 29 November, 09:34
    0
    The correct answer is option e.

    Explanation:

    Suppose the US treasury is planning to issue $50 billion of new bonds. An increase in the supply of bonds will cause the supply curve to shift to the right. As a result, the price of bonds is likely to decline.

    There is an inverse relationship between bond prices and interest rate. So this decline in the bond prices will cause the interest rate to increase.
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