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Chapter 5: Q.5 (page 164)

What will happen to the demand for Rembrandt paintings if the stock market undergoes a boom? Why?

Short Answer

Expert verified

Demand for paintings will rise.

Step by step solution

01

Introduction

The amount demanded of an asset is directly related to wealth, expected return on asset, and liquidity of the asset, and negatively proportional to expected return on alternative asset, liquidity of the alternative asset, according to the theory of portfolio choice.

02

Explanation

A stock market boom indicates a sharp increase in share sales in the market, as well as a boost to the country's GDP. If the stock market rises, it improves people's wealth, which raises demand for paintings because more people can now purchase them.

As a result, demand for paintings will rise.

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Most popular questions from this chapter

The demand curve and supply curve for one-year discount bonds with a face value of $1050are represented by the following equations:Bd:Price=-0.8脳Quantity+1160Bs:Price=Quantity+720Suppose that, as a result of monetary policy actions, the Federal Reserve sells 90 bonds that it holds. Assume that bond demand and money demand are held constant.

a. How does the Federal Reserve policy affect the bond supply equation? b. Calculate the effect on the equilibrium interest rate in this market, as a result of the Federal Reserve action.

Increasing prices erode the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to http://minneapolisfed.org/index.cfm. What would a car that costs $22,000today have cost the year you were born?

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?

Explain why you would be more or less willing to buy gold under the following circumstances: a. Gold again becomes acceptable as a medium of exchange.

b. Prices in the gold market become more volatile.

c. You expect inflation to rise, and gold prices tend to move with the aggregate price level.

d. You expect interest rates to rise

Using both the supply and demand for bonds and liquidity preference frameworks, show how interest rates are affected when the riskiness of bonds rises. Are the results the same in the two frameworks?
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