Chapter 5: Q.5 (page 164)
What will happen to the demand for Rembrandt paintings if the stock market undergoes a boom? Why?
Demand for paintings will rise.
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An important way in which the Federal Reserve decreases the money supply is by selling bonds to the public. Using a supply and demand analysis for bonds, show what effect this action has on interest rates. Is your answer consistent with what you would expect to find with the liquidity preference framework?
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.
a. Which investment should you choose to maximize your expected return: stocks, bonds, or commodities?
b. If you are risk-averse and had to choose between the stock and the bond investments, which would you choose? Why?
Explain why you would be more or less willing to buy a house under the following circumstances:
a. You just inherited .
b. Real estate commissions fall from of the sales price to 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.
Suppose Maria prefers to buy a bond with a expected return and standard deviation of its expected return, while Jennifer prefers to buy a bond with a expected return and standard deviation of its expected return. Can you tell if Maria is more or less risk-averse than Jennifer?
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? Discuss the possible resulting situations.
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