Final answer:
Upon an increase in the savings rate in France, the supply of bonds would increase, which would lead to lower interest rates in the future. The correct prediction for France is therefore a permanent lower interest rate scenario due to increased wealth.
Step-by-step explanation:
If people in France decide to permanently increase their savings rate, we can predict certain impacts on the French bond market and domestic interest rates. An increase in savings rate means that there will be more funds available for investments in bonds. This increase in supply of money for investments will shift the supply curve of bonds to the right, leading to an increase in wealth. As a result, there should be more purchasing power available for bonds. Contrary to causing a shift in the demand curve for bonds, this will likely cause a shift in the supply curve of financial capital (the supply of bonds).
The relationship between bond yields (interest rates) and the supply and demand for bonds is inversely related; as the supply of bonds increases due to higher savings, it exerts downward pressure on interest rates. Thus, with all else being equal, France can expect permanent lower interest rates in the future, because the increased supply of savings makes more capital available for borrowing, and lenders will be willing to accept lower interest rates.
Therefore, the correct prediction for France's bond market, given an increase in the savings rate, would be option D: There will be an increase in wealth, creating a shift to the right in the supply curve for bonds in France. France can, therefore, expect permanent lower interest rates in the future.