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Chapter 5: Q.12 (page 164)

Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.

Short Answer

Expert verified

If the stock brokerage commission reduces, the interest rate will fall.

Step by step solution

01

Introduction

A bond is a financial instrument that an entity issues in exchange for a return on investment. They used to be able to fund their business. The bond's return might be either fixed or variable.

02

Explanation

If the stock brokerage commission is reduced, the stock will become more appealing to investors than bonds, and the demand for bonds would be reduced. Because of the decrease in bond demand, the bond's demand curve will shift to the left. Because the bond's demand curve has shifted left, the price of the bond will rise while the interest rate falls, because the bond's price and interest rate are inversely related.

As a result, if the stock brokerage commission reduces, the interest rate will fall.

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Most popular questions from this chapter

Why should a rise in the price level (but not in expected inflation) cause interest rates to rise when the nominal money supply is fixed?

One of the points made in this chapter is that inflation erodes investment returns. Go to http://www.moneychimp.com/articles/econ/inflation_calculator.htm and review how changes in inflation alter your real return using the second inflation calculator. What happens to the difference between the future value of an investment and its inflation-adjusted value as

a. inflation increases?

b. the investment horizon lengthens?

c. expected returns increase?

Would fiscal policymakers ever have reason to worry about potentially inflationary conditions? Why or why not?

The president of the United States announces in a press conference that he will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates if the public believes him.

In the aftermath of the global economic crisis that started to take hold in 2008, U.S. government budget deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for quite some time. Does this make sense? Why or why not?

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