In March 2010, Greece announced that it might have trouble in the future paying off the bonds it had sold to finance its huge government deficits. The Wall Street Journal reported, Prevailing uncertainty over Greece’s ability to fund itself . . . kept Greek government bonds under increasing pressure Thursday, pushing 10-year Greek yields above 7%.
(Source: Emese Bartha, Pressure Intensifies on Greek Debt, Wall Street Journal, and April 8, 2010.)
a. Use a demand and supply graph for the Greek bond market to illustrate why the interest rate on Greek government bonds was increasing. Be sure that your graph indicates any shifts in the Demand curve and /or supply curve for Greek bonds.