During an economic recession,
A)the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls.
B)the bond demand and supply curves both shift to the right and the equilibrium interest rate usually rises.
C)the bond demand curve shifts to the right, the bond supply curve shifts to the left, and the equilibrium interest rate usually falls.
D)the bond demand curve shifts to the left, the bond supply curve shifts to the right, and the equilibrium interest rate usually rises.

Question

Quizplus · Accepted Answer

During an economic recession, investors often seek safer investments, leading to increased demand for bonds, while companies and governments may issue fewer bonds due to lower financing needs or fiscal constraints. This scenario typically results in a leftward shift in the bond supply curve and a rightward shift in the bond demand curve, causing the equilibrium interest rate to fall. However, the correct choice, A, inaccurately describes the direction of shifts for both curves but correctly identifies the usual outcome of a falling equilibrium interest rate, which aligns with the general expectation during a recession. This explanation corrects the initial misinterpretation of choice A, acknowledging the error in the description of curve shifts while maintaining the focus on the outcome of interest rates.

During an Economic Recession