Which of the following would typically lead to an increase in government bond prices?

An increase in government bond prices typically coincides with an improvement in creditworthiness. When the creditworthiness of a government improves, it indicates a lower risk of default on its debt obligations. As investors perceive the bonds as safer investments, demand for these bonds increases. This heightened demand drives up the prices of government bonds, as investors are willing to pay more for the perceived safety and reliability of returns on these bonds.

In contrast, a rise in inflation rates generally leads to a decrease in bond prices, as higher inflation erodes the purchasing power of future coupon payments and principal, making fixed income less attractive. Higher unemployment rates may also signal economic distress, potentially lowering confidence in the government’s fiscal health and similarly reducing demand for its bonds. Decreased government spending can have mixed effects; while it might improve fiscal health, it can also signal reduced economic activity, which could negatively affect bond prices. Thus, the improvement in creditworthiness is directly aligned with rising bond prices due to increased investor confidence.