Assume that a country’s government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run?

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02-03-2020
Social Studies

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Assume that a country’s government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run?

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Answer: Bond price decrease while Price level Increase

Explanation: A bond is a contract between two parties, it is a debt security, under which the issuer ( government or business owners) owes the holders a debt and is obliged to pay them interest or to repay the principal at a later date, which is called the maturity date. Bonds is a means where the government or corporations secure loans from investors and pay them at an agreed date with interest.

In the instance a country’s government increases borrowing, it is safe to say the price of bonds will decrease while price level will increase in the short run.