Assume the following: 1). The current market price for a 10 year U. S Assume the following: 1) The current market price for a 10 year U.S. Government Bond is $10,000 with interest paid annually of $955. 2) What is the effective interest rate of this bond?

Bond Interest Rate = Interest Paid/Price x 100 Bond Interest Rate = $955/$10,000 x 100 = 9.55%

3). In order to conduct Expansionary Fiscal Policy to fight 3) In order to conduct Expansionary Fiscal Policy to fight recession the Federal Government increases G and runs a budget deficit. What will it do to make up for its lack of tax revenue to finance its overspending? What market will it go to for these funds? It will sell government securities to the public. The Loanable Funds Market is involved.

It will offer a lower than market price. 4) In order to sell those government securities, will it offer a higher or lower than market price? It will offer a lower than market price.

Bond Interest Rate = $955/$9,000 x 100 = 10.61% 5) Assume that the Federal Government sells those bonds for a price of $9,000. Considering that the interest paid is still $955, what is the new effective interest rate on these 10 year bonds? Bond Interest Rate = $955/$9,000 x 100 = 10.61%

There is an inverse relationship. 6) Therefore, what can be concluded about the price of a government security and its effective interest rate? There is an inverse relationship.