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