1. if the federal government were able to in a reasonable and rational way reduce the US deficit, what would happen to the equilibrium price, yield and quantity of bonds. Assume that there is a single market for all bonds.
2. What should happen to the equilibrium price, interest rate, and quantity of bonds today if people expect that these bonds will be worth half as much in the future? Use simplified model of the bond market. A complete answer will include both a graph and a brief written explanation.
3. Suppose that the collapse of two large financial institutions within a year cause stock market to crash and causes expectations about the future of the economy to fall significantly. What should happen to the equilibrium price, interest rate and quantity of bonds in the bond market, assuming there is only one kind of bond. Require graphs and a brief written explanation to answer this question.
4. What should happen to the equilibrium price, interest rate and quantity of bonds if the economy starts to improve? Use a simple bond market graph to develop this question, and give a brief written explanation.