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?