2. Consider a bond that promises to pay $100 in one year. a. What is the interes
ID: 1184142 • Letter: 2
Question
2. Consider a bond that promises to pay $100 in one year. a. What is the interest rate on the bond if its price today is $75? $85? $95? b. What do your results show to be the relationship between the price of the bond and interest rates? c. If the interest rate is 8%, what is the price of the bond today? 3. Suppose that money demand is given by Md = $Y(.25 - i) Where $Y is $100. Also, suppose that the supply of money is $20. a. What is the equilibrium interest rate? b. If the Federal Reserve Bank wants to increase i by 10 percentage points (e.g., from 2% to 12%), at what level should it set the supply of money? 4. Suppose that the economy is characterized by the following behavioral equations: C = 180 + 0.8Yd I = 160 G = 190 T = 200 Solve for the following variables. a. Equilibrium GDP (Y) b. Disposable income (Yd) c. Consumption spending (C) 5. Use the economy described in problem 2. a. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain. b. Assume that G is now equal to 150. Solve for equilibrium output. Compute total demand. Is it equal to production? Explain. c. Assume that G is equal to 150, so output is given by your answer to (b). Compute private plus public saving. Is the sum of private and public saving equal to the investment? Explain.Explanation / Answer
1. a. 33.33%,17.647% and 5.263%
b.negative relationship. If price of bond increase,interest rate declines.
c. $100
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