ECO quiz 3
The demand curve and supply curve for one-year discount bonds with a face value of $1,030 are represented by the following equations: Bd: Price equals= −0.7Quantity+1,140 Bs: Price equals= Quantity + 700 The expected equilibrium quantity of bonds is: The expected equilibrium price of bonds is: The expected interest rate in this market is:
259 (set Q equations equal to each other) 959 (700+259) 7.40% (1030-959/959)
Using the numbers 1, 2, 3, and 4, rank the following four assets from most liquid (1) to least liquid (4). A 10,000-square-foot office building $2,000 in cash A $10,000 Treasury bill 100 shares of Google stock
4 1 2 3
The president of the United States announces in a press conference that he will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates if the public believes him. As a result of the president's announcement, people's expectations of inflation will ______ which causes the demand for bonds to shift to the _________. However, the lower expected inflation rate causes the cost of borrowing to ________ so the supply of bonds will ________ which causes the supply curve for bonds to shift to the __________ The impact of this change in bond demand and supply will cause equilibrium interest rates to _________.
Fall right rise decrease left decrease
How might a sudden increase in people's expectations of future real estate prices affect interest rates?
Interest rates would increase because real estate would have a relatively higher rate of return compared to bonds, which would cause the demand for bonds to decrease.
Which market is likely to represent corporate Baa bonds? Which market is likely to represent the 10-year Treasury note?
Market A Market C
What is the opportunity cost of holding $1500 in cash if the relevant interest rate is 3%? If interest rates rise, this opportunity cost will ___________, and individuals will hold ___________ cash balances.
OC = .03(1500) = $45 increase; Smaller
If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current chair, what will happen to interest rates?
Slower money growth will lead to a liquidity effect, which will raise interest rates; however, the lower income, price level, and inflation will tend to lower interest rates.
What would happen to the demand for Rembrandt paintings if the stock market undergoes a boom?
The demand for Rembrandt paintings would increase because of the increase in people's wealth
"The more risk-averse people are, the more likely they are to diversify." Is this statement true, false, or uncertain?
True because the benefits to diversification are greater for a person who cares more about reducing risk.
Would fiscal policy makers ever have reason to worry about potentially inflationary conditions?
Yes, higher inflation leads to a higher debt service burden and increases the costs of financing deficit spending.
Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment: To maximize your expected return, you should choose: If you are risk-averse and had to choose between the stock or the bond investments, you would choose:
commodities the bond portfolio because there is less uncertainty over the outcome.
In the long run, if the output, price-level, and expected inflation effects outweigh the liquidity effect, to reduce interest rates the Federal Reserve should
decrease the growth rate of the money supply.
Explain why you would be more or less willing to buy a share of Microsoft stock in the following situations: You would be _______ willing to buy a share of Microsoft stock if your wealth falls because _______________ You would be ________ willing to buy a share of Microsoft stock if you expect the stock to appreciate in value because __________ You would be ________ willing to buy a share of Microsoft stock if the bond market becomes more liquid because ____________ You would be _______ willing to buy a share of Microsoft stock if you expect gold to appreciate in value because ________ You would be ________ willing to buy a share of Microsoft stock if prices in the bond market become more volatile because __________
less; you have less money to spend on all of your potential assets more; you believe the amount of the return on your investment will be positive less; you can now sell bonds easier than stocks less; the return on gold relative to stocks has improved more; stocks have become relatively safer than bonds
Suppose there is a/an increase in the growth rate of the money supply. If the liquidity effect is smaller than the output, price-level, and expected inflation effects, then in the long run, interest rates
rise when compared to their initial
In the aftermath of the global economic crisis that started to take hold in 2008, U.S. government budget deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for quite some time. Does this make sense?
Yes, the decrease in investment opportunities and known risk factors significantly offset the wealth effect on demand and the deficit effect on supply