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1. Consider a bond that promises to pay $100 in one year. If its price today is $85, If the interest rate is 8%, the price of the then the interest rate on the bond is bond today is (approximately)

1. Consider a bond that promises to pay $100 in one year. If its price today is $85, If the interest rate is 8%, the price of the then the interest rate on the bond is bond today is (approximately)

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1. Consider a bond that promises to pay S100 in one year. If its price today is $85, If the interest rate is 8%, the price of the then the interest rate on the bond is bond today is (approximately) 2. Suppose that money demand is given by M' =SY(0.25 – i), where SY is 100. Also, suppose that the supply of money is $20. The equilibrium interest rate is If the central bank wants to increase i by 10 percentage points (e.g. from 2% to 12%, the actual interest rate depends on result you calculate), it should set the supply of money at 3. The balanced budget multiplier For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macro economically neutral. Put another way, we examine whether it is possible to affect output through changes in G and T so that the government budget remains balanced. Start from equation (3.8): Y = a. When G increases by one unit, Y increases by, b. When T increases by one unit, Y increases by, Suppose that the economy starts with a balanced budget: G =T. Suppose that Gand T increase by one unit each. Using your answers to (a) and (b), the change in Y equals_ Is balanced budget changes in G and T macroeconomically neutral? (yes or no)
Transcribed Image Text:1. Consider a bond that promises to pay S100 in one year. If its price today is $85, If the interest rate is 8%, the price of the then the interest rate on the bond is bond today is (approximately) 2. Suppose that money demand is given by M' =SY(0.25 – i), where SY is 100. Also, suppose that the supply of money is $20. The equilibrium interest rate is If the central bank wants to increase i by 10 percentage points (e.g. from 2% to 12%, the actual interest rate depends on result you calculate), it should set the supply of money at 3. The balanced budget multiplier For both political and macroeconomic reasons, governments are often reluctant to run budget deficits. Here, we examine whether policy changes in G and T that maintain a balanced budget are macro economically neutral. Put another way, we examine whether it is possible to affect output through changes in G and T so that the government budget remains balanced. Start from equation (3.8): Y = a. When G increases by one unit, Y increases by, b. When T increases by one unit, Y increases by, Suppose that the economy starts with a balanced budget: G =T. Suppose that Gand T increase by one unit each. Using your answers to (a) and (b), the change in Y equals_ Is balanced budget changes in G and T macroeconomically neutral? (yes or no)
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