Raphael observes that at the current level of interest rates there is an excess supply of bonds, and therefore he anticipates an increase in the price of bonds. Is Raphael correct?
(A). Raphael is correct. The supply and demand analysis tells us that interest rates will decrease, creating a movement along both the demand curve (in the northwest direction) and the supply curve (in the northeast direction) in order to reach the equilibrium interest rate (and price). The bond's price will therefore rise.
(B). Raphael is incorrect. The supply and demand analysis tells us that interest rates will increase, creating a movement along both the demand curve (in the southeast direction) and the supply curve (in the southwest direction) in order to reach the equilibrium interest rate (and price). The bond's price will therefore
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