Question

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? Why or why not

Answer 1

Answer and Explanation:

the supply effect of large deficits should cause interest rates to go up. The economic crisis caused wealth and income to be lower

which brought about a depression inTreasury bond demand, corporate bond supply also fell the more as investment opportunities reduced. A greater leftward shift in the bond

supply curve than the rightward shift in the bond demand curve would bring about a rise in

bond prices and a reduction in interest rates. Because off the seriousness of the global crisis, the United States

treasury debt became safe for forms of investment, with relative risk falling and liquidity

for U.S. treasury debt rising.

This then increased the U.S. treasury bond demand, resulting into higher

bond prices and lower yields.