Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federalbudget deficit or surplus, international factors, and levels of business activity-influence interest rates.Based on your understanding of the impact of macroeconomic factors, identify which of the following statements aretrue or false:FalseStatementsTrueActions that lower short-term interest rates will always lower long-term interest rates.During the credit crisis of 2008, investors around the world were fearful about the collapse ofreal estate markets, shaky stock markets, and lliquidity of several securities in the UnitedStates and several other nations. The demand for U.S. Treasury bonds increased, which ledto a rise in their price and a decline in their yields.When the Fed increases the money supply, short-term interest rates tend to decline.The Federal Reserve Board has a significant influence over the level of economic activity,inflation, interest rates in the United States.

The long term interest rate is also determined by average expected inflation rate. So that short…

Answered: Apart from risk components, several…

Macroeconomics: Principles and Policy (MindTap Course List)

13th Edition

ISBN:9781305280601

Author:William J. Baumol, Alan S. Blinder

Publisher:William J. Baumol, Alan S. Blinder

Chapter13: Monetary Policy: Conventional And Unconventional

Section: Chapter Questions

Problem 7DQ

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Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to five years, and plot the resulting yield curves for the following paths of one-year interest rates over the next five years: 5%, 6%, 7%, 6% and 5%.
Under the Pure Expectations Theory, if these investors believe that interest rates will rise in the near future, a. Two statements are correct. b. they will make up for the lower short-term yield when the short-term securities mature, and they reinvest at a higher rate (if interest rates rise) at maturity. c. All statements are correct. d. the large supply of funds in the short-term market will force annualized yields down, while the reduced supply of long-term funds forces long-term yields up. e. they will invest their funds mostly in the short-term risk-free securities so that they can soon reinvest their funds in securities that offer higher yields after interest rates increase. f. their actions cause funds to flow into the short-term market and away from the long-term market. g. Three statements are correct.
Based on economics forecast and analysis, one year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows 5.65%, 6.75% 6.85% 7.15% respectively and the liquidity premium from 2nd year to 4th year is 0.05%, 0.10%, 0.12%. Using the liquidity premium theory, plot the current yield curve. Make sure you label the axes on the graph and identify the four annual rates on the curve both on the axes and on the yield curve itself.
Assuming the expectations theory is the correct theory of the term structure, calculate the interest rates in the term structure for maturities of one to four years, and plot the resulting yield curves for the following paths of one-year interest rates over the next four years: 4%, 6%, 11%, 15%
Please explain why this statement is (False). The unbiased expectations hypothesis of the term structure posits that long-term interest rates are unrelated to expected future short-term rates.
What does a steep upward sloping yield curve indicate? You determining your answer keep in mind the Fisher equation: i=r+π^e i=r+π^e, where i is the nominal interest rate, r is the real interest rate and π^e is r the expected inflation rate. Group of answer choices higher short term expected inflation higher long-term expected inflation lower long-term expected inflation random changes in expected inflation
Suppose you observe that short-term interest rates are higher than long-term interest rates. a. What expectations must people have regarding future interest rates? b. Why might the above relationship signal a recession? Why might it not? c. What will the yield curve for this problem look like? Q4 Why is the fact that stock prices follow a random walk a signal of stock market efficiency? What would have to be true if stock prices did not follow a random walk?
With regards to Modern Theories of Interest Rates and Their Application to the Caribbean Region, explain each of the four Modern Theories of Interest Rates (Pure Expectations Theory, Liquidity Preference Theory, Market Segmentation Theory, Preferred Habitat Theory) with examples from the Caribbean region.
What is the best explanation of liquidity premium? What is suggested by an upward sloping yield according to segmented market theory? Explain
Identify and explain the three theories of the term structure of interest rates, including anyrelevant assumptions.
How do inflationary expectations influence interest rates on mortgage? Please elaborate by expressing your thoughts about your findings in at least
After the global financial crisis, there has been a heated debate about whether the sluggish recovery in advanced economies reflects the secular stagnation or a slowing trend under debt overhang. Advocates of secular stagnation argue that tepid investment spending along with subdued consumption by households would result in persistent output gap and slow growth for many years to come. Also, the resulting excess of global savings over global investment in turn would put the real interest rate on a downward path. There are several explanations for this secular stagnation hypothesis. Which of the following cannot be viewed as such explanation?a. Decline in investment rates due to a dearth of profitable investment opportunitiesb. Decline in the relative price of investment goods – hence the same investment projects can be pursued by committing a smaller share of GDP, which results in a lower amount of investment in total.c. Decline in population growth rate means capital has less…

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