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Chapter 16: Q1. (page 347)
When bond prices go up, interest rates go _______.
a. up
b. down
c. nowhere
The correct option, in this case, will be 鈥榖).down鈥�.
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Suppose a bond with no expiration date has a face value of \(10,000 and annually pays \)800 in fixed interest. In the table provided below, calculate and enter either the interest rate that the bond would yield to a bond buyer at each of the bond prices listed or the bond price at each of the interest yields shown. What generalization can you draw from the completed table?
Bond Price \( 8,000 | Interest Yield, % ________ |
______ | 8.9 |
\)10,000 $11,000 _______ | ________ ________ 6.2 |
Suppose that actual inflation is 3 percentage points, the Fed鈥檚 inflation target is 2 percentage points, and unemployment is 1 percent below the Fed鈥檚 unemployment target. According to the Taylor rule, what value will the Fed want to set for its targeted interest rate?
Refer to the table for Moola below to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate, and, if either, what is the amount? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?
Money Supply (\() | Money Demand (\)) | Interest Rate (%) | Investment at Interest Rate Shown (\() | Potential Real GDP (\)) | Actual Real GDP at Interest (Rate Shown) ($) |
500 500 500 500 500 | 800 700 600 500 400 | 2 3 4 5 6 | 50 40 30 20 10 | 350 350 350 350 350 | 390 370 350 330 310 |
In 1980, the U.S. inflation rate was 13.5 percent, and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed鈥檚 target interest rate? Would you be surprised to learn that the Fed鈥檚 targeted interest rate (the federal funds rate) reached 18.9 percent in December 1980?
What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?
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