Suppose we have two separate markets for assets, the market for safe assets and

Question

Suppose we have two separate markets for assets, the market for safe assets and the market for risky assets. Now consider the market for safe assets. Many market observers believe two forces are causing high prices of safe assets (or equivalently, low interest rates on safe assets). First, following the Asian financial crisis in the late 1990s, many large emerging-market nations (e.g., China) sought to build up their foreign reserves of safe assets. Second, before the Great Recession, sovereign debt (e.g., US Treasury Bonds, German Treasury Bonds, Spanish Treasury Bonds, Greek Treasury Bonds, etc.) and AAA mortgaged-backed securities were considered safe assets. During a Starting from an initial equilibrium in the market for safe assets, what is the impact on the price and quantity of safe assets from b. Starting from an initial equilibrium in the market for safe assets, what is the impact on the price and quantity of safe assets from c Suppose that these two forces were the only forces affecting the market for safe assets. If you observe the price and quantity in the Great Recession, many of these assets were no longer classified as safe assets. an increased desire among emerging-markets to build up their foreign reserves of safe assets? the realization that many mortgaged-backed securities and sovereign debts were no longer safe? the safe asset market after the Great Recession, how could you determine which force was more important? TT! ? Paragraph: Arial : 3(12p) : :-·-·T·?·? Mashups Path: p Words:0

Explanation / Answer

a. An increased desire among the emerging markets to build up their foreign reserves of safe assets has led to decline in the supply of safe assets by the emerging nations as they want to keep the safe assets to build up their reserves. This has shifted the supply curve of safe assets leftwards and thus led to increase in prices of safe assets.

b. Since the demand of risky assets which is a substitute of safe assets has fallen , thus , demand for risky assets has increased and the demand curve of risky assets has shifted rightwards leading to rise in prices of safe assets.

c. It has been observed that there has been shortage of safe assets in the economy after the Great Recession and this has led to the conclusion that force of building foreign reserve assets by the emerging nations is more than the latter force.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.