2) With the aid of bond market analysis, explain how the market equilibrium of rate of interest is determined. Price of Bonds , P($) ( i - 07.) 450 900 P" = 650 ( 18 = 17.64) BOO (i - 25.07) 400 Quantity of Bonds, B ( $ billions) It occurs when the amount that people are willing to buy (demand or Bd) equals the amount that people are willing to sell (supply or Bs) at a given price. 1) When demand = supply or Bd = Bs , the equilibrium; price of and interest rate. 2) When demand > supply or Bd > Bs , there is excess demand (E>F) thus, the price of bond will increase and interest rate will decrease 3) When demand A) thus, the price of bond will decrease and interest rate will increase