1. What factors might increase the demand for bonds? The supply?
2. What would happen to the market for bonds if a law were passed that set a minimum price on bonds that was above the equilibrium price?
3. When the price of bonds decreases, the interest rate rises. Explain.
4. One journalist writing about the complex interactions between various markets in the economy stated: "When the government spends more than it takes in taxes it must sell bonds to finance its excess expenditures. But selling bonds drives interest rates down and thus stimulates the economy by encouraging more investment and decreasing the foreign exchange rate, which helps our export industries." Carefully analyze the statement. Do you agree? Why or why not?
5. What do you predict will happen to the foreign exchange rate if interest rates in the United States increase dramatically over the next year? Explain, using a graph of the foreign exchange market. How would such a change affect real GDP and the price level?