If the IS curve is given by Y=1,700–100r and the LM curve is given by Y=500+100r, then equilibrium income and interest rate are given by: Y=1100 , r=5% Y=1100, r=6% Y= 1000, r=5% Y=1200 , r=5%
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- Over the next three years, the expected path of 1-year interest rate is 4, 1, and 1 percent. Today if you buy $1 of one-year bond and when it matures you use the money you receive to buy another one-year bond, then your expected rate of return for this $1 investment is ____% (round to the nearest integer). If the expectations theory of the term structure is true, then it implies that the current interest rate on 2-year bond must be ____% (round to one decimal place x.x)Explain why the IS curve is downward sloping in the interest rate-output space.Assume that the money demand function is (M / P) ^ d = 2, 200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The consumption function is given by C = 200 + 0.5(Y - T) and the investment function is I = 1.000 - 200r , where r is measured in percent , G equals 300, and T equals 200. Calculate the equilibrium level of output. Show the IS-LM equilibrium graphically.
- “According to the expectations theory of the term structure, it is better to invest in one-year bonds, reinvestedover two years, than to invest in a two-year bond if interest rates on one-year bonds are expected to be the samein both years.” Is this statement true, false, or uncertain?The LM curve shows all combinations of output and interest rate consistent with equilibrium on the market of goods true or falseDiscuss briefly the liquidity preference theory (LFT) and differentiate it from the loanable funds (classical) model of interest rate determination. Differentiate the equation of demand for real money balances in the Keynesian model based on the LFT from the equation of demand for real money balances in the classical model based on the quantity theory of money, by providing their respective money demand equations.
- In January of 2019 , Sweden announced that it would increase its sale of government bonds from 55 billion krone to 85 billion krone. This resulted in (an increase, decrease, no change, an ambiguous change) in the price of government bonds and (an increase, decrease, no change, an ambiguous change) in the yield of government bonds.Based on the projections of the repurchase rate in the extract above.Explain, with the aid of a graph, the impact of a cut in the interest rate on thedemand for money.Over the next three years, the expected path of 1 year interest rates is 1, 2, and 1 percent, and the 1-year, 2-year, and 3- year term premia are 0, 0.2. and 0.5 percent, respectively. Using the information, if the expectations theory of the term structure is true, then your expected rate of return for buying a two-year bond today over the next two-year is ____% (round to the nearest integer).
- Over the next three years, the expected path of 1-year interst rates is 4,1, and 1 percent. Today you buy $1 of one-year bond and when it matures you plan to use the money you receive to reinvest in one-year bond again. Then your expected rate of return for this $1 investment is _____% (round to the nearest integer). If the expectations theory of the term structure is true, then your expected rate of return for buying a two-year bond today is ____%, which implies that the current interest rate on 2-year bond must be ____%Explain why when the spread between government bonds rate and corporate bond rates of the same maturity widens, it is helpful in predicting a possible recession. (widening of the spread just means that the difference between corporate and government bonds increases)Please explain the correct answer(s). An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period, prices are expected to rise by 2 percent. Which statement(s) below is/are true? 1.I. 4 percent is the desired real risk-free interest rate. 2.II. 6 percent is the approximate nominal rate of interest required. 3.III. 2 percent is the expected inflation rate over the period. A) I only B) II only C) III only D) I and II only E) I, II, and III