Question content area
Part 1
In the aftermath of the global economic crisis that started to take hold in 2008, U.S. government budget deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for quite some time. Does this make sense?
A.
Yes, the decrease in investment opportunities and known risk factors significantly offset the wealth effect on demand and the deficit effect on supply.
B.
No, the effects of the economic crisis led to significantly lower wealth and income while increasing bond supply even more. This resulted in a decrease in bond prices and an increase in interest rates.
C.
No, the large federal deficits required the Treasury to issue more bonds; thus, the supply curve for bonds shifted to the right, increasing the equilibrium interest rate.
D.
Yes, U.S. Treasury debt became a safe haven for investment, which shifted the demand curve for bonds to the right. However, since the government was not able to secure all of its debt, the supply of bonds decreased and the supply curve shifted to the left.