EC 303 - The Behavior of Interest Rates Homework

EC 303 - JSU - The Behavior of Interest Rates Homework

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​Yes, interest rates would rise because stocks become more liquid than​ before, which would reduce the demand for bonds

Will there be an effect on interest rates if brokerage commissions on stocks​ fall?

A.

​Yes, interest rates would fall because stocks would have a relatively higher rate of return than​ bonds, which would reduce the demand for bonds

B.

​No, interest rates would remain the same because the brokerage commissions would only affect the stock market

C.

​Yes, interest rates would rise because people would want to hold more stocks and fewer​ bonds, which would increase the demand for bonds

D.

​Yes, interest rates would rise because stocks become more liquid than​ before, which would reduce the demand for bonds

Suppose that people in France decide to permanently increase their savings rate.

Part 2

Predict what will happen to the French bond market in the future. Can France expect higher or lower domestic interest​ rates?

A.

There will be a decrease in​ wealth, creating a shift to the left in the demand curve for bonds in France. France can therefore expect permanent lower interest rates in the future.

B.

There will be a decrease in​ wealth, creating a shift to the left in the demand curve for bonds in France. France can therefore expect permanent higher interest rates in the future.

C.

There will be an increase in​ wealth, creating a shift to the right in the demand curve for bonds in France. France can therefore expect permanent higher interest rates in the future.

D.

There will be an increase in​ wealth, creating a shift to the right in the demand curve for bonds in France. France can therefore expect permanent lower interest rates in the future

Raphael is incorrect. The supply and demand analysis tells us that interest rates will​ increase, creating a movement along both the demand curve​ (in the southeast​ direction) and the supply curve​ (in the southwest​ direction) in order to reach the equilibrium interest rate​ (and price). The​ bond's price will therefore fall.

Raphael observes that at the current level of interest rates there is an excess supply of​ bonds, and therefore he anticipates an increase in the price of bonds.

Is Raphael​ correct?