Economics 310 Money and Banking 2017s

Quiz

Answer Two of the following questions:

Q. 1. Interest rates were lower in the mid-1980s than they were in the late 1970s, yet many
economists have commented that real interest rates were actually much higher in the mid-1980s
than in the late 1970s. Does this make sense? Do you think that these economists are right?
Q. 2. An important way in which the Federal Reserve decreases the money supply is by selling
bonds to the public. Using a supply and demand analysis for bonds, show what effect this action
has on interest rates.
Q. 3. 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?
Q. 4. Assuming that the expectations theory is the correct theory of the term structure, calculate
the interest rates in the term structure for maturities of one to five years, and plot the resulting
yield curves for the following series of one-year interest rates over the next
five years:
(a) 5%, 7%, 7%, 7%, 7%
(b) 5%, 4%, 4%, 4%, 4%
How would your yield curves change if people preferred shorter-term bonds over longer-term
bonds?
Q. 5. If a yield curve looks like the one below, what is the market predicting about the movement
of future short-term interest rates?
What might the yield curve indicate about the market’s predictions about the inflation rate in the
future?