Raphael observes that at the current level of interest rates there is an excess supply of bonds, and therefore he anticipates an increase in the price of bonds. Is Raphael correct?

(A). Raphael is correct. The supply and demand analysis tells us that interest rates will decrease, creating a movement along both the demand curve (in the northwest direction) and the supply curve (in the northeast direction) in order to reach the equilibrium interest rate (and price). The bond's price will therefore rise.

(B). Raphael is incorrect. The supply and demand analysis tells us that interest rates will increase, creating a movement along both the demand curve (in the southeast direction) and the supply curve (in the southwest direction) in order to reach the equilibrium interest rate (and price). The bond's price will therefore

Question

Kathy Bryan

Business

6 June, 01:49

Raphael observes that at the current level of interest rates there is an excess supply of bonds, and therefore he anticipates an increase in the price of bonds. Is Raphael correct?

(A). Raphael is correct. The supply and demand analysis tells us that interest rates will decrease, creating a movement along both the demand curve (in the northwest direction) and the supply curve (in the northeast direction) in order to reach the equilibrium interest rate (and price). The bond's price will therefore rise.

(B). Raphael is incorrect. The supply and demand analysis tells us that interest rates will increase, creating a movement along both the demand curve (in the southeast direction) and the supply curve (in the southwest direction) in order to reach the equilibrium interest rate (and price). The bond's price will therefore

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Answers (1)

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Salvador · Answer 1

The answer is: Raphael is incorrect

Explanation:

If there exists an excess in the quantity supplied of bonds, that means that the current interest rate is lower than the equilibrium rate. Therefore, the equilibrium rate will increase to reach the equilibrium rate, which will cause a decrease in the prices of bonds.