Question

In the aftermath of the global economic crisis that started to take hold in $2008$, U.S. government budget deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for quite some time. Does this make sense? Why or why not?

Short answer

The interest rate fell because the leftward movement of a supply curve was greater than the leftward movement of a demand curve.

Step-by-step solution

Introduction

A bond is a financial instrument issued by a company in exchange for interest on the bond. Entity uses to fund its operations. The bond's return might be either fixed or variable.

Explanation

As a result of the economic crisis, the government's budget deficit expanded dramatically, raising the bond's risk, lowering demand and shifting the demand curve to the left. However, the economic crisis limited investment prospects, significantly reducing bond supply and shifting the supply curve of bonds to the left. The leftward movement of the supply curve was greater than the leftward movement of the demand curve, resulting in a price increase and a reduction in interest rates. Furthermore, the risk that the economic crisis poses to other security markets made the bond market appear safer than other assets, boosting demand for the bond.

The interest rate fell because the leftward movement of a supply curve was greater than the leftward movement of a demand curve.