ECO 316 Week 1 Chapter 6 Determining Market Interest Rates

This archive file of ECO 316 Week 1 Chapter 6 Determining Market Interest Rates shows the solutions to the following problems:

6.1 Multiple Choice Questions
1) Japan's very low market interest rates in the early 2000s reflected
2) How is the interest rate that prevails in the bond market determined?
3) In the bond market, the buyer is considered to be
4) In the bond market, the seller is considered to be
5) In the market for loanable funds, the buyer is considered to be
6) In the market for loanable funds, the seller is considered to be
7) In the market for loanable funds the price of the funds exchanged is
8) The bond demand curve slopes down because
9) The formula for the yield to maturity, i, on a discount bond is
10) A one-year discount bond with a face value of $1000 that is currently selling for $900 has an interest rate of
11) A one-year discount bond with a face value of $10,000 that is currently selling for $9400 has an interest rate of
12) A one-year discount bond with a face value of $1000 has an interest rate of 7%. What is its price?
13) A one-year discount bond with a face value of $1000 has an interest rate of 4%. What is its price?
14) Loanable funds refers to
15) The demand for bonds is
16) The supply curve of loanable funds slopes up because
17) The bond supply curve
18) The bond supply curve slopes up because
19) The demand curve for loanable funds slopes down because
20) Which of the following statements is correct?
21) If the equilibrium price in the bond market for a one-year discount bond is $950, then the equilibrium interest rate in the loanable funds market must be
22) If the equilibrium price in the bond market for a one-year discount bond is $9400, then the equilibrium interest rate in the loanable funds market must be
23) If the equilibrium interest rate in the loanable funds market on a one-year discount bond is 10%, then the equilibrium price in the bond market must be
24) If the equilibrium interest rate in the loanable funds market on a one-year discount bond is 8%, then the equilibrium price in the bond market must be
25) If there is an excess supply of loanable funds at a given interest rate, then
26) If there is an excess demand for loanable funds at a given interest rate, then
27) If there is an excess demand for bonds at a given price of bonds, then
28) If there is an excess supply of bonds at a given price of bonds, then
29) Which of the following would NOT cause the demand curve for bonds to shift?
30) As wealth increases in the economy, savers are willing to
31) As wealth increases in the economy, savers are willing to
32) As wealth increases in the economy, we would expect to observe
33) If the expected gains on stocks rise, while the expected returns on bonds do not change, then
34) If the expected gains on stocks rise, while the expected returns on bonds do not change, then
35) Which age group typically has the highest savings rate?
36) The life-cycle model of consumption and saving focuses on
37) Which of the following statements concerning the relation among consumption, saving, and income over the life cycle is INCORRECT?
38) A decrease in expected inflation
39) If the federal government were to guarantee a minimum rate of return on corporate bonds, the result would be a
40) If recessions in the United States were to increase in frequency, length, and severity, the likely result would be a(an)
41) Investors value liquidity in an asset because
42) Suppose that Congress passes a law that prohibits mutual funds from holding corporate bonds. The likely result would be a(an)
43) Suppose that a bond rating service is established that specializes in rating municipal bonds that had not previously been rated. The likely result would be
44) The demand curve for bonds would be shifted to the left by an
45) The demand curve for bonds would be reduced by
46) The demand curve for bonds would be shifted to the left by
47) The supply curve for loanable funds would decline due to
48) The supply curve for loanable funds would increase due to a(n)
49) Businesses typically issue bonds to finance
50) During a period of economic expansion, when expected profitability is high,
51) In an effort to increase government revenue, Congress and the president decide to increase the corporate profits tax. The likely result will be
52) An increase in the corporate profits tax is likely to cause
53) Suppose that Congress passes an investment tax credit. The likely result will be
54) The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result
55) If a government's income tax receipts exceed its expenditures, the government is running a
56) During the last several decades, the government sector
57) From 1970 through 1997, the domestic government sector was
58) If the federal government decreases its purchases and doesn't decrease taxes, the bond supply shifts to the
59) If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate
60) If the government increases taxes while holding expenditures constant
61) If households increase their saving at the same time that the government increases its deficit
62) Studies by economists suggest that
63) During wars
64) The supply curve for bonds would be shifted to the right by
65) The supply curve for bonds would be shifted to the left by
66) During an economic recession,
67) During an economic recession,
68) Most economists credit the decline in short-term nominal rates over the 1980s and early 1990s to
69) As a result of higher expected inflation,
70) A closed economy is one that
71) In the 1980s, 1990s, and early 2000s, the United States
72) An open economy is one that
73) In an open economy, desired domestic lending
75) A small open economy
76) The equilibrium real interest rate in Belgium will be
77) In a large open economy,
78) The increase in German investment in what was formerly East Germany resulted in
79) Suppose that a small economy that had previously been closed becomes open. If its real interest rate had previously been below the world real interest rate, we would expect that
6.2 Essay Questions
1) During 2000, the government repurchased $30 billion in U.S. Treasury bonds outstanding. This was the first time this had been done since the administration of Herbert Hoover in the early 1930s. Analyze the impact of this repurchase on the bond market.
2) Assess the impact on the bond market of the rise in Internet trading of stocks.
3) Suppose that businesses in Japan reduce their spending on plant and equipment. What will be the effect on spending on plant and equipment by businesses in the United States?
4) What impact do savings rates in Belgium have on the real interest rate that businesses in Belgium must pay to obtain the funds to finance their spending on plant and equipment?

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