The market for bonds is initially described by the supply of bonds - S₀, and the demand for bonds - D₀, with the equilibrium price and quantity being P₀ and Q₀. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant, we would expect to see:

Question

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If the federal government offers tax breaks on the purchase of new equipment for businesses, this will encourage businesses to invest in new equipment, and as a result, they will require more funds to finance their investments. Therefore, the demand for bonds will increase, resulting in a higher equilibrium price and quantity of bonds. However, this does not mean that the bond demand curve will shift since the demand for bonds is not influenced by the price of new equipment. On the other hand, if the investors are buying more bonds to finance business investments, the suppliers of bonds will demand a higher interest rate to compensate for the increased risk; that will shift the bond supply curve to the right from S₀ to S₁, resulting in a higher equilibrium price and quantity of bonds.

The Market for Bonds Is Initially Described by the Supply