Chapter 5: Q.14 (page 164)
Suppose that people in France decide to permanently increase their savings rate. Predict what will happen to the French bond market in the future. Can France expect higher or lower domestic interest rates?
Bond demand will rise, and the interest rate will fall.
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The demand curve and supply curve for one-year discount bonds with a face value of are represented by the following equations:Suppose that, as a result of monetary policy actions, the Federal Reserve sells 90 bonds that it holds. Assume that bond demand and money demand are held constant.
a. How does the Federal Reserve policy affect the bond supply equation? b. Calculate the effect on the equilibrium interest rate in this market, as a result of the Federal Reserve action.
Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.
Suppose that many big corporations decide not to issue bonds, since it is now too costly to comply with new financial market regulations. Can you describe the expected effect on interest rates?
The demand curve and supply curve for one-year discount bonds with a face value ofare represented by the following equations:
a. What is the expected equilibrium price and quantity of bonds in this market?
b. Given your answer to part (a), what is the expected interest rate in this market?
Suppose you are in charge of the financial department of your company and you have to decide whether to borrow short or long term. Checking the news, you realize that the government is about to engage in a major infrastructure plan in the near future. Predict what will happen to interest rates. Will you advise borrowing short or long term?
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