The relation between the bond price and the interest rate.

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Answer 1

Question

Chapter D, Problem 1QP

To determine

The relation between the bond price and the interest rate.

Expert Solution & Answer

Explanation of Solution

The inverse relation between the bond price and its interest rate is shown in the figure below:

Macroeconomics, Chapter D, Problem 1QP

According to the diagram, initially, the money market is in equilibrium at ‘a’ with the bond price PB1 and the interest rate of 5 percent. When the Fed increases the money supply, the supply curve shifts to the right from S1 to S2 (shown in Panel (a)). This creates a money surplus in the market, and the individual buys more bonds and the demand for bond will rise. Then, the demand curve will shift from D1 to D2 (shown in Panel (b)). This increased demand creates a shortage of bond at PB1 price. Then, both markets dislocate from the equilibrium. The increased demand of bond pushes its price up, and then the interest rate will decline. Finally, the money market will be located at ‘b’ with 4 percent interest rate and the bond market PB2 price.

Economics Concept Introduction

Bond price: Bond price is the present value of a bond compared to its future promises of pay. It is inversely related to its interest rate.

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Students have asked these similar questions

1. Riaz has a limited income and consumes only Apple and Bread. His current consumption choice is 3 apples and 5 bread. The price of apple is $3 each, and the price of bread is $2.5 each. The last apple added 5 units to Sadid's utility, while the last bread added 7 units. Is Riaz making the utility-maximizing choice? Why or why not? Do you suggest any adjustment in Riaz's consumption bundle? Why or why not? Give reasons in support of your answer. State the condition for a consumer's utility maximizing choice and illustrate graphically. 2. Consider the following table of long-run total costs for three different firms: Quantity Total Cost ($) Firm A Firm B Firm C 1 60 11 21 2 70 24 34 3 80 39 49 4 90 56 66 5 100 75 85 6 110 96 106 7 120 119 129 Does each of these firms experience economies of scale or diseconomies of scale? Explain your answer with necessary calculations.

Riaz has a limited income and consumes only Apple and Bread. His current consumption choice is 3 apples and 5 bread. The price of apple is $3 each, and the price of bread is $2.5 each. The last apple added 5 units to Sadid's utility, while the last bread added 7 units. Is Riaz making the utility-maximizing choice? Why or why not? Do you suggest any adjustment in Riaz's consumption bundle? Why or why not? Give reasons in support of your answer.State the condition for a consumer's utility maximizing choice and illustrate graphically.

1. Riaz has a limited income and consumes only Apple and Bread. His current consumption choice is 3 apples and 5 bread. The price of apple is $3 each, and the price of bread is $2.5 each. The last apple added 5 units to Sadid's utility, while the last bread added 7 units. Is Riaz making the utility-maximizing choice? Why or why not? Do you suggest any adjustment in Riaz's consumption bundle? Why or why not? Give reasons in support of your answer. State the condition for a consumer's utility maximizing choice and illustrate graphically.

Answer 2

Question

Chapter D, Problem 1QP

To determine

The relation between the bond price and the interest rate.

Expert Solution & Answer

Explanation of Solution

The inverse relation between the bond price and its interest rate is shown in the figure below:

Macroeconomics, Chapter D, Problem 1QP

According to the diagram, initially, the money market is in equilibrium at ‘a’ with the bond price PB1 and the interest rate of 5 percent. When the Fed increases the money supply, the supply curve shifts to the right from S1 to S2 (shown in Panel (a)). This creates a money surplus in the market, and the individual buys more bonds and the demand for bond will rise. Then, the demand curve will shift from D1 to D2 (shown in Panel (b)). This increased demand creates a shortage of bond at PB1 price. Then, both markets dislocate from the equilibrium. The increased demand of bond pushes its price up, and then the interest rate will decline. Finally, the money market will be located at ‘b’ with 4 percent interest rate and the bond market PB2 price.

Economics Concept Introduction

Bond price: Bond price is the present value of a bond compared to its future promises of pay. It is inversely related to its interest rate.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter D, Problem 1QP

To determine

The relation between the bond price and the interest rate.

Expert Solution & Answer

Explanation of Solution

The inverse relation between the bond price and its interest rate is shown in the figure below:

Macroeconomics, Chapter D, Problem 1QP

According to the diagram, initially, the money market is in equilibrium at ‘a’ with the bond price PB1 and the interest rate of 5 percent. When the Fed increases the money supply, the supply curve shifts to the right from S1 to S2 (shown in Panel (a)). This creates a money surplus in the market, and the individual buys more bonds and the demand for bond will rise. Then, the demand curve will shift from D1 to D2 (shown in Panel (b)). This increased demand creates a shortage of bond at PB1 price. Then, both markets dislocate from the equilibrium. The increased demand of bond pushes its price up, and then the interest rate will decline. Finally, the money market will be located at ‘b’ with 4 percent interest rate and the bond market PB2 price.

Economics Concept Introduction

Bond price: Bond price is the present value of a bond compared to its future promises of pay. It is inversely related to its interest rate.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter D, Problem 1QP

To determine

The relation between the bond price and the interest rate.

Expert Solution & Answer

Explanation of Solution

The inverse relation between the bond price and its interest rate is shown in the figure below:

Macroeconomics, Chapter D, Problem 1QP

According to the diagram, initially, the money market is in equilibrium at ‘a’ with the bond price PB1 and the interest rate of 5 percent. When the Fed increases the money supply, the supply curve shifts to the right from S1 to S2 (shown in Panel (a)). This creates a money surplus in the market, and the individual buys more bonds and the demand for bond will rise. Then, the demand curve will shift from D1 to D2 (shown in Panel (b)). This increased demand creates a shortage of bond at PB1 price. Then, both markets dislocate from the equilibrium. The increased demand of bond pushes its price up, and then the interest rate will decline. Finally, the money market will be located at ‘b’ with 4 percent interest rate and the bond market PB2 price.

Economics Concept Introduction

Bond price: Bond price is the present value of a bond compared to its future promises of pay. It is inversely related to its interest rate.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter D, Problem 1QP

To determine

The relation between the bond price and the interest rate.

Expert Solution & Answer

Explanation of Solution

The inverse relation between the bond price and its interest rate is shown in the figure below:

Macroeconomics, Chapter D, Problem 1QP

According to the diagram, initially, the money market is in equilibrium at ‘a’ with the bond price PB1 and the interest rate of 5 percent. When the Fed increases the money supply, the supply curve shifts to the right from S1 to S2 (shown in Panel (a)). This creates a money surplus in the market, and the individual buys more bonds and the demand for bond will rise. Then, the demand curve will shift from D1 to D2 (shown in Panel (b)). This increased demand creates a shortage of bond at PB1 price. Then, both markets dislocate from the equilibrium. The increased demand of bond pushes its price up, and then the interest rate will decline. Finally, the money market will be located at ‘b’ with 4 percent interest rate and the bond market PB2 price.

Economics Concept Introduction

Bond price: Bond price is the present value of a bond compared to its future promises of pay. It is inversely related to its interest rate.

Answer 6

Chapter D, Problem 1QP

To determine

The relation between the bond price and the interest rate.

Expert Solution & Answer

Explanation of Solution

The inverse relation between the bond price and its interest rate is shown in the figure below:

Macroeconomics, Chapter D, Problem 1QP

According to the diagram, initially, the money market is in equilibrium at ‘a’ with the bond price PB1 and the interest rate of 5 percent. When the Fed increases the money supply, the supply curve shifts to the right from S1 to S2 (shown in Panel (a)). This creates a money surplus in the market, and the individual buys more bonds and the demand for bond will rise. Then, the demand curve will shift from D1 to D2 (shown in Panel (b)). This increased demand creates a shortage of bond at PB1 price. Then, both markets dislocate from the equilibrium. The increased demand of bond pushes its price up, and then the interest rate will decline. Finally, the money market will be located at ‘b’ with 4 percent interest rate and the bond market PB2 price.

Economics Concept Introduction

Bond price: Bond price is the present value of a bond compared to its future promises of pay. It is inversely related to its interest rate.

Answer 7

Chapter D, Problem 1QP

To determine

The relation between the bond price and the interest rate.

Answer 8

Expert Solution & Answer

Explanation of Solution

The inverse relation between the bond price and its interest rate is shown in the figure below:

Macroeconomics, Chapter D, Problem 1QP

According to the diagram, initially, the money market is in equilibrium at ‘a’ with the bond price PB1 and the interest rate of 5 percent. When the Fed increases the money supply, the supply curve shifts to the right from S1 to S2 (shown in Panel (a)). This creates a money surplus in the market, and the individual buys more bonds and the demand for bond will rise. Then, the demand curve will shift from D1 to D2 (shown in Panel (b)). This increased demand creates a shortage of bond at PB1 price. Then, both markets dislocate from the equilibrium. The increased demand of bond pushes its price up, and then the interest rate will decline. Finally, the money market will be located at ‘b’ with 4 percent interest rate and the bond market PB2 price.