Answer each question with the explanations.
You will find my professor instructions in the attachment.
-These are my professor instructions:
Each of these questions relates to material discussed in class or the reading. Your responses should reflect that; that is to say, answer them using the concepts and kinds of analysis you have been exposed to so far.
Answer each question completely, show your work.
Money and Banking
Directions: Each of these questions relates to material discussed in class or the reading. Your responses should reflect that; that is to say, answer them using the concepts and kinds of analysis you have been exposed to so far.
Answer each question completely, show your work, and turn in the assignment at the start of class stapled together, with your name and section on it.
1. Suppose the nominal interest rate increases from 5% to 10% while the expected inflation rate increased from 2% to 9%. Are households more or less likely borrow for purchasing homes? Why?
2. Suppose the fed uses expansionary monetary policy to impact interest rates. Depict this change in the market for money. What is the impact on interest rate? What is the name of this effect and how does it work? Suppose that after the impact initial interest rates eventually rise. What effects lead to this and how do they work? Depict them in the graph of the market.
3. When the risk associated with real assets (such as volatility in the gold market) increases, what impact do we expect in the bond market? Depict this impact in a graph.
4. Consider the recent significant gains in stock market prices. What impact will the increased return on stocks have in the bond market?
5. Model in both the Portfolio Choice and Liquidity Preference models the impact of an increase in the risk associated with bonds. How do the predictions of the two models compare?
6. In a paragraph compare and contrast the Expectations, Segmented Markets and Liquidity Premium theories and their predictions for the shape of the yield curve.
7. Suppose that a major policy change increases the amount of tax benefits from holding State and Municipal bonds. Depict the impact on the market for these bonds and Treasury bonds. How do the interest rates compare after the change?
