If the U.S. Treasury is forced to sell bills and bonds to foreigners to finance deficits, this may ________ the price of bonds and ________ the interest rates on the bonds.
A) drive down; drive down
B) drive down; drive up
C) drive up; drive down
D) drive up; drive up

Question

Quizplus · Accepted Answer

When the U.S. Treasury sells bills and bonds to foreigners to finance deficits, it increases the supply of bonds in the market. This oversupply of bonds decreases the demand for bonds, causing the prices of bonds to fall. The fall in bond prices leads to an increase in their yields, which in turn leads to an increase in their interest rates. Therefore, the correct answer is B, drive down the price of bonds and drive up the interest rates on the bonds.

If the US Treasury Is Forced to Sell Bills and Bonds to Bonds