Using the supply and demand for bonds framework, why are interest rates procyclical (rising when the economy i

Question

Using the supply and demand for bonds framework, why are interest rates procyclical (rising when the economy is expanding and falling during recessions).

Answer 1

Because during an expansion, companies are eager to build new factories and accumulate inventories; one way to finance those factories and inventories is to issue bonds. Supply of bonds expands, driving down their prices (which means higher effective interest rates). During a recession, many companies put plant expansion plans on hold and reduce inventories, so supply of bonds shrinks and their prices go up (which means interest rates drop).

Answer 2

This is macroeconomics.

I think it's because when the economy is expanding the demand for money expands causing the demand curve to shift to the right.

Look up the demand curve for money.

The supply for money is vertical because it does not have a chance to adjust in such a short period of time. In the long term, it shifts left or right.

As for why it shifts, read the response from the guy below.