EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 32, Problem 11DQ
To determine
The relation of decline in the real estate value, subprime mortgage loans and the mortgage backed securities to financial crisis of 2007-08.
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Assume that securitization combined with borrowing and irrational exuberance in Hyperville have driven up the value of asset-backed financial securities at a geometric rate, specifically from $4 to $8 to $16 to $32 to $64 to $128 over a six-year time period. Over the same period, the value of the assets underlying the securities rose at an arithmetic rate from $4 to $6 to $8 to $10 to $12 to $14.
If these patterns hold for decreases as well as for increases, by how much would the value of the financial securities decline if the value of the underlying asset suddenly and unexpectedly fell by $6?
Instructions: Give your answer as a whole number.
Consider a 5-year bond with a face value of $500 and an annual coupon rate of 5%. If the yield is 9% then
the market price of this bond will be approximately
O $464
O $436
O $394
• $442
Question 19
In the IS-LM model with interest-setting monetary policy and endogenous money, an expansionary
monetary policy will tend to cause
an increase in the level of income, an increase in the transactions demand for money and an increase in the quantity of
money
O an increase in the level of real income, an increase in the asset demand for money and a reduction in the quantity of
money
an increase in the level of income, a decrease in the asset demand for money and a reduction in the quantity of money
O adecrease in the level of income, an increase in the asset demand for money and an increase in the transactions
demand for money
Question 20
In the IS-LM model with interest setting monetary policy and endogenous money, an expansionary fiscal
policy will tend to
O increase the equilibrium level of…
Question 38
Long-term bonds are generally
I
less risky than short-term bonds and so pay higher interest.
less risky than short-term bonds and so pay lower interest.
more risky than short-term bonds and so pay higher interest.
more risky than short-term bonds and so pay lower interest.
Question 39
On which bond is default most likely?
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Chapter 32 Solutions
EP ECONOMICS,AP EDITION-CONNECT ACCESS
Ch. 32 - Prob. 1DQCh. 32 - Prob. 2DQCh. 32 - Prob. 3DQCh. 32 - Prob. 4DQCh. 32 - Prob. 5DQCh. 32 - Prob. 6DQCh. 32 - Prob. 7DQCh. 32 - Prob. 8DQCh. 32 - Prob. 9DQCh. 32 - Prob. 10DQ
Ch. 32 - Prob. 11DQCh. 32 - Prob. 12DQCh. 32 - Prob. 13DQCh. 32 - Prob. 14DQCh. 32 - The three functions of money are: LO34.1 a....Ch. 32 - Prob. 2RQCh. 32 - Prob. 3RQCh. 32 - Prob. 4RQCh. 32 - Prob. 5RQCh. 32 - Prob. 6RQCh. 32 - Prob. 7RQCh. 32 - Prob. 8RQCh. 32 - Prob. 9RQCh. 32 - Prob. 1PCh. 32 - Prob. 2PCh. 32 - Prob. 3PCh. 32 - Prob. 4PCh. 32 - Prob. 5P
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- O If the market interest rate (i) increases today, the Price of a Bond (P) today will decline. The following are correct statements about the impact of Market Interest Rate (i*) on value and return of a typical Coupon Bond, EXCEPT: The YTM of a Bond and the Market Interest Rate (i*) are the same value, even in the Short Term. O For a long term bond, if the Market Interest rate (i*) is expected to increase, the current Price of such Bond will Decline. For a two period Bond, if the Market Interest rate (i*) is expected to increase in the next period, the Expected Total Return (RET) on such bond will decline. Long Term Bonds are considered more risky than Short Term bonds, in part due to the risk associated to changes in future interest rates.arrow_forwardPlease refer to the following graph: Yield Curve 2.00% 1.80% 1.60% 1.40% 1.20% 1.10% 1.00% 0.80% 1 year 2 year 1.50% 3 year 1.80% What does the market expect 1-year interest rate will be next year, according to the expectations theory? O 1.4% O 1.9% O 1.3% O 2.4%arrow_forwardIf Janet expects interest rates to rise in the near future, she will probably be willing to Select one: O a. maintain only the current holding of bonds. O b. O c. buy bonds now, and hold less money. put her money under her mattress rather than in a bank account. O d. buy bonds now, but only if their price falls. O e. sell bonds now, and hold more money.arrow_forward
- 5. Consider the one-year interest rates known at the following dates:year 0: 2%year 1: 2.5year 2: 3%year 3: 3.5%year 4: 4%year 5: 4.5%year 6: 5%year 7: 5.5%year 8: 6%year 9: 6.5%Using the Expectations Theory, find the interest rates of maturities 1 through 10. Usethe arithmetic average method. What do they suggest about the shape of the yieldcurve? Make sure to show your work.arrow_forwardThe diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*. Real Interest Rate 5% 4% 3% 2% 1% X ID 20 30 40 50 60 70 80 90 100 FIGURE 25-3 Select one: O a. demand for; -60 O b. demand for; 60 O c. O d. Refer to Figure 25-3. Suppose the interest rate in this market for financial capital is 4%. In this case there is an excess Oe. supply of; 90 supply of; 30 e. demand for; 30 NS Quantity of Investment and Saving ($ billions) financial capital of billion dollars.arrow_forwardAssume that the global average real interest rate is 5%. Britain witnesses severe inflation, where the current inflation rate is 10%. To curb inflation they decide to increase interest rates to 17%. Then the real rate of interest in Britain is results in increased the US dollar ($). which is for British bonds and in turn causes the British pound (£) to O 10%; higher; supply; depriciate 7%; higher; demand; appreciate O 7%; higher; demand; depriciate 5%; lower; supply; appreciate than the global average, which againstarrow_forward
- 1. 2. 3. Which expression describes the flattest money demand schedule? O a. 1=450-2(3) O b. 1=450-9(3) O c. L-5(200)-5(10) O d. L=5(200)-8(10) Which of the following will lead to an increase in the equilibrium interest rate in the money market? O a. Increase in general price level O b. An increase in income O c. Decrease in general price level d. The Central Bank increases money supply Which of the following statements describes the LM curve? O a. It has a negative slope. O b. It describes the relationship between supply and demand of goods. O c. It represents the combination of interest rate and income where the goods market is in equilibrium. O d. None of the abovearrow_forwardE E I I I Scenario 1: Suppose the economy is operating at potential GDR. Unemployment is 5%, Infation is running at 11% and the Federal Funds Rate is 8%. In scenario 1 above, what is the real short term interestrate? O 11% O 3N -3% 6% O000Oarrow_forwardTable 1 1 year 2 years 3 years 1.30% 2.00% 2.40% Table 1 shows the interest rates for Treasury securities of different maturities. Assume that the liquidity premium theory is correct. Refer to Table 10n this day, what did investors expect the interest rate to be on the one-year Treasury bill two years from now if the term premium on a two-year Treasury note is 0.5% and the term premium on a three-year Treasury note is 0.9%? Select one: OA 1.0% O B. 1.3% OC 1.5% O D. 1.7%arrow_forward
- The income elasticity of money demand is ny = 0.7 and the interest rate elasticity of money demand is nj = -0.02. Suppose that the central bank increases the money supply by 5%, real income increases by 2% and inflation is 3%. What is the percentage increase in the nominal interest rate? O -0.3 (or -30%) O 0.3 (or 30%) O-0.1 (or -10%) O 0.1 (or 10%)arrow_forward• Suppose that a person’s wealth is $50,000 and that her yearlyincome is $60,000. Also suppose that her money demand functionis given by Md = $Y10.35 - i2Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on her demand for bonds?What are the effects of an increase in income on her demand for money and her demand for bonds? Explain in wordsarrow_forwardPlease use the graph to answer the questions. Given the market conditions, what will the prevailing interest rate be? O 6% 18% O 2% 10% Given the market conditions, how much money is borrowed in the loanable funds market? O $10 billion. $50 billion O$90 billion O $70 billion $30 billion. Interest rate (%) 18- 16- 14- 12. 10. 8- 6- + et 0 Demand Supply 60 70 80 90 10 20 30 40 50 Quantity of loanable funds (in billions of dollars)arrow_forward
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