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Show graphically the effect of a sudden increase in the volatility of gold prices on interest rates in the bond market.
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- Why are bond prices and interest rates inversely related?Use the liquidity preferences model to show what will happen to the interest rate if it is below the equilibrium interest rate. Make sure you integrate the bond market changes into your answer.Draw the supply and demand curves for the bond and explain what will happen to the equilibrium price and quantity of the bond for each of the following situations: a) The inflation rate is expected to increase. b) The wealth of economic agents in the economy increases, but at the same time, the Ministry of Finance increases the corporate income tax rate. c) The economy is experiencing expansion. d) The government runs a budget deficit. e) Most corporate bonds (ratings) have been downgraded
- What will happen in the bond market if the government imposes a limit on the amount of daily transactions?Which characteristic of an asset would be affected? How might it affect the interest rates?Which of the following events will cause the interest rate to increase? an open market sale of bonds an increase in the reserve deposit ratio (i.e., Ө) all of these an increase in incomeIf expectations of future short-term interest rates suddenlyfell, what would happen to the slope of the yield curve?
- Identify two different Theories of Interest Rate determination. List two characteristics of each theory identified above.Suppose everyone expects investment to rise sharply in three months. How would this expectation be likely to affect bond prices?Below you will find the Demand and Supply Curves for $250,000 bonds that mature in 18 years: Qd = 400,000 – 2(P) Qs = 3(P) – 100,000 If the Fed wants to move the interest rate to 5%, what would the bond price have to change to in order to achieve this?
