What would happen to the market for bonds if a law was passed which set a minimum price on bonds that was above the equilibrium price?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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A minimum price on anything is known as a price floor.  Economic theory tells us that price floors lead to surpluses of a given good or service.

If the government passes a law saying that bonds can only be sold at or above a price that is higher than equilibrium, more people will want to sell bonds.  We can see that this is true from the law of supply, which tells us that people will be willing and able to sell more of a good or service when they can charge a higher price for that good or service (all other things being equal).  This law, then, will make the quantity supplied of bonds rise.

At the same time, however, this law will cause the quantity demanded of bonds to drop.  We can see that this is true from the law of demand, which tells us that people will be willing and able to buy less of a good or service when the price of that good or service increases (again, all other things being equal).  That means that this minimum price law will cause the quantity demanded of bonds to drop.

If the quantity supplied of bonds increases while the quantity demanded decreases, there will more bonds offered for sale but fewer bonds bought (relative to what would have happened at the equilibrium price).  This will result in a surplus of bonds and it will also result in fewer bonds being bought or sold than would have been the case if the government had allowed market forces to determine bond prices.

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