Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 7: Q.16 (page 210)

If higher money growth is associated with higher future inflation, and if announced money growth turns out to be extremely high but is still less than the market expected, what do you think will happen to long-term bond prices?

Short Answer

Expert verified

The interest rate and the price of bonds have a negative connection. As a result of the decrease in long-term interest rates, long-term bond prices are expected to rise.

Step by step solution

01

Inflation : 

It indicates the economy's rising trend. It increases the general level of prices while lowering the value of money over time.

02

Explanation : 

Inflation rises less than projected, lowering future short-term interest rates. A decrease in future short-term interest rates affects the future long-term interest rate at the same time. As a result, long-term interest rates would fall in the future.

The interest rate and the price of bonds have a negative connection. As a result of the decrease in long-term interest rates, long-term bond prices are expected to rise.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The Internet is a great source of information on stock prices and stock price movements. Yahoo Finance is a great source for stock market data. Go to http://finance .yahoo.com and click on “Markets,” then “World Indices,” and then the DJI symbol to view current data on the Dow Jones Industrial Average. Click on the chart to manipulate the different variables. Change the time range and observe the stock trend over various intervals. Have stock prices been going up or down over the past day, week, three months, and year?

Suppose that increases in the money supply lead to a rise in stock prices. Does this mean that when you see that the money supply has sharply increased in the past week, you should go out and buy stocks? Why or why not?

Suppose that you decide to play a game. You buy stock by throwing a dice a few times, using that method to select which stock to buy. After ten months you calculate the return on your investment and the return earned by someone who followed “expert” advice during the same period. If both returns are similar, would this constitute evidence in favor of or against the efficient market hypothesis?

“Foreign exchange rates, like stock prices, should follow a random walk.” Is this statement true, false, or uncertain? Explain your answer.

“If stock prices did not follow a random walk, there would be unexploited profit opportunities in the market.” Is this statement true, false, or uncertain? Explain your answer.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free