on the right vertical axis increases as we go down the axis Only increases in

On the right vertical axis increases as we go down

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on the right vertical axis increases as we go down the axis. Only increases in the variables are shown. The effect of decreases in the variables on the change in supply would be the opposite of those indicated in the remaining columns. B s 2 B s 1 B (increases ) P (increases ) i B s 2 B s 1 B (increases ) P (increases ) i B s 2 B s 1 B (increases ) P (increases ) i
Expected Profitability of Investment Opportunities. The more profitable plant and equipment investments that a firm expects it can make, the more willing it will be to borrow in order to finance these investments. When the economy is growing rapidly, as in a business cycle expansion, investment opportunities that are expected to be profitable abound, and the quantity of bonds supplied at any given bond price and interest rate will increase (see Figure 4). Therefore, in a business cycle expansion, the supply of bonds increases, and the supply curve shifts to the right. Likewise, in a recession, when there are far fewer expected profitable investment opportunities, the supply of bonds falls, and the supply curve shifts to the left. Expected Inflation. As we saw in Chapter 4, the real cost of borrowing is more accu- rately measured by the real interest rate, which equals the (nominal) interest rate minus the expected inflation rate. For a given interest rate, when expected inflation increases, the real cost of borrowing falls; hence the quantity of bonds supplied increases at any given bond price and interest rate. An increase in expected inflation causes the supply of bonds to increase and the supply curve to shift to the right (see Figure 4). Government Activities. The activities of the government can influence the supply of bonds in several ways. The U.S. Treasury issues bonds to finance government deficits, the gap between the government s expenditures and its revenues. When these deficits are large, the Treasury sells more bonds, and the quantity of bonds supplied at each bond price and interest rate increases. Higher government deficits increase the sup- ply of bonds and shift the supply curve to the right (see Figure 4). On the other hand, 98 P A R T I I Financial Markets F I G U R E 4 Shift in the Supply Curve for Bonds When the supply of bonds increases, the supply curve shifts to the right. ( Note: P and i increase in opposite directions. P on the left vertical axis increases as we go up the axis, while i on the right vertical axis increases as we go down the axis.) F 750 800 850 900 950 1,000 100 200 300 400 500 600 700 Quantity of Bonds, B ($ billions) 0.0 5.3 11.1 17.6 25.0 33.0 Price of Bonds, P ($) ( P increases ) Interest Rate, i (%) ( i increases ) I H C G F I H C G B s 1 B s 2 .r equests/cpi/cpiai.txt Contains historical information about inflation.
government surpluses, as occurred in the late 1990s, decrease the supply of bonds and shift the supply curve to the left.

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