Greenspan's Conundrum Spells Confusion for Us All

In January2005, the interest rate on bonds was4% a year and it was expected to rise to5% a year by the end of 2005. As the rate rose to4.3% duringFebruary, most commentatorsfocused, not on why the interest raterose, but on why it was so low before. Explanations of this'conundrum' included that unusual buying and expectations for an economic slowdown were keeping the interest rate low.

Source: Financial Times, February26, 2005

Explain how"unusual buying" might lead to a low real interest rate.

Explain how"investors' expectations for an economicslowdown" might lead to a lower real interest rate.

"Unusual buying" might lead to a low real interest rate because______, the price of a bond______ and the interest rate falls.

A.

the demand for bondsincreases; rises

B.

the supply of bondsincreases; falls

C.

the demand for bondsdecreases; falls

D.

the supply of bondsdecreases; rises