Question

The president of the United States announces in a press conference that he will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates if the public believes him.

Short answer

If the public believes in his anti-inflation plan, the interest rate will fall.

Step-by-step solution

Introduction

Inflation is defined as a condition in which the price of all goods and services begins to rise, reducing people's real purchasing power.

Explanation

If the general public believes in the anti-inflation programmed, the return on products will fall, increasing demand for the bond. The demand curve for bonds will move rightward due to the higher demand for bonds.

Reduced inflation, on the other hand, will raise the real interest rate, increasing the cost of borrowing. As a result, the supply of bonds will fall, shifting the supply curve to the left. The bond's price will climb due to a rightward movement in the demand curve and a leftward change in the supply curve, lowering the interest rate.

As a result, if the public believes in his anti-inflation plan, the interest rate will fall.