Money and Banking chapter 5

What effect will a sudden increase in the volatility of gold prices have on interest rates?

Interest rates fall. the increased volatility of gold prices makes bonds relatively less risky relative to gold and causes the demand for bonds to increase. the demand curve, B^d, shifts to the right and the equilibrium interest rate falls

How might a sudden increase in people's expectations of future real estate prices affect interest rates?

Interest rates would rise. A sudden increase in people's expectactations of future real estate prices raises the expected return on real estate relative to bonds, so the demand for bonds falls. The demand curve B^d shifts to the left, bond prices fall, and the equilibrium interest rate rises

What will happen to the demand for Rembrandt paintings if the stock market undergoes a boom? Why?

The rise in the value of stocks would increase people's wealth and therefore the demand for Rembrandts would rise

"The more risk-averse people are, the more likely they are to diversify." Is this statement true, false, or uncertain? Explain your answer.

True, because the benefits to diversification are greater for a person who cares more about reducing risk.

"No one who is risk-averse will ever buy a security that has a lower expected return, more risk, and less liquidity than another security." Is this statement true, false, or uncertain? Explain your answer.

True. because for a risk averse person, more, a lower expected return, and less liquidity make a security less desirable

Explain why you would be more or less willing to buy gold under the following circumstances: a. Gold again becomes acceptable as a medium of exchange. b. Prices in the gold market become more volatile. c. You expect inflation to rise, and gold prices tend to move with the aggregate price level. d. You expect interest rates to rise.

a.) More, because it has become more liquid b.)Less, because it has become more risky c.) More, because its expected return has risen d.) More, because its expected return has risen relative to the expected return on long-term bonds, which has declined

4. Explain why you would be more or less willing to buy long-term AT&T bonds under the following circumstances: a. Trading in these bonds increases, making them easier to sell. b. You expect a bear market in stocks (stock prices are expected to decline). c. Brokerage commissions on stocks fall. d. You expect interest rates to rise. e. Brokerage commissions on bonds fall.

a.) More, because the bonds have become more liquid b.) More, because their expected return has risen relative to stocks c.) Less, because they have become less liquid relative to stocks d.) Less, because their expected return has fallen e.) More, because they have become more liquid

Explain why you would be more or less willing to buy a house under the following circumstances: a. You just inherited $100,000. b. Real estate commissions fall from 6% of the sales price to 5% of the sales price. c. You expect Microsoft stock to double in value next year. d. Prices in the stock market become more volatile. e. You expect housing prices to fall.

a.) More, because your wealth has increased b.) More, because the house has become more liquid c.) Less, because its expected return has fallen relative to Microsoft stock d.) More, because it has become less risky relative to stocks e.) Less, because its expected return has fallen

Explain why you would be more or less willing to buy a share of Microsoft stock in the following situations: a. Your wealth falls. b. You expect the stock to appreciate in value. c. The bond market becomes more liquid. d. You expect gold to appreciate in value. e. Prices in the bond market become more volatile.

a.) Your Wealth Falls Less wealth means less ability to purchase stock. b.)Expect stock to appreciate in value An increase in the expected value of the stock will cause people to buy more of it. c.) The bond market becomes more liquid The more liquid an asset is relative to alternative assets, the more desirable it is, and the greater quantity demanded. d.)You expect gold to appreciate in value An appreciation of gold means that the expected return of the stock is decreasing relatively. Thus, the demand will fall. e.) Prices in the bond market become more volatile .Prices in the bond market become more volatile. A decrease in relative volatility increases the demand for the asset.