Falling interest rates have triggered a rally in the bond market that has many investors rejoicing. Why would falling interest rates trigger a rally in the bond market? 

 

A8. The government clearly sees some room for interest rates to drop. It should help cushion the short- term effects of the recession and help the economy pick up over the next eighteen months. How would lower interest rates help the economy pick up?

A9. A combination of a significant upward revision to GDP growth, a downward revision of the output gap, and stronger than expected inflation data suggest that soon the central bank will.....

a. What is the output gap?

b. Complete this

B3. Bonds rallied sharply yesterday, cheered on by the news that the recession isn't over yet. Prices climbed by as much as $8.75 for each $1,000 face amount in the U.S. government securities market after the Commerce Department reported that GDP fell by 0.1 percent in the second quarter. Why would bad news rally bonds?

B5. However, with the sharp fall in interest rates, central bank officials expect a pickup in economic activity that will bring about an upsurge in monetary growth. a. Why would a sharp fall in interest rates be expected to cause a pickup in economic activity? b. Why would a pickup in economic activity bring about an upsurge in monetary growth?

B19. For some months now, the central bank has reduced the attention it pays to the levels of interest rates and has kept a close eye on expansion of the money supply. This policy change has made market interest rates more responsive to the high rate of inflation. a. Why would this policy change have caused interest rates to become more responsive to the high rate of inflation? b. Is this a good or a bad thing?

Answer rating: 100% (QA)

Falling interest rates trigger a rally in the bond market for several reasons 1 Bond prices move inversely to interest rates When interest rates fall ... View the full answer