## Macroeconomics Study Set 47

Business

## Quiz 15 :

Financial Markets and Expectations

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Q13 Q13 Q13

Suppose the current one- year interest rate is 6%, and financial markets expect the one- year interest rate next year to be 7%, and expect the one- year rate to be 8% the year after that. Given this information, the yield to maturity on a three- year bond will be:

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Multiple Choice

Q44 Q44 Q44

Suppose there are two types of bonds (one- year bonds and two- year bonds) and that the yield curve is initially upward sloping in period t. For this question assume that: (1) expected inflation is zero; and (2) the relevant interest rate on the vertical axis of the IS- LM model is the one- year interest rate. Based on our understanding of the IS- LM model, of the yield curve and of financial markets, we know with certainty that an announcement in period t of a partially unexpected future increase in taxes (to be implemented in period t + 1) will have which of the following effects?

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Multiple Choice

Q46 Q46 Q46

Assume that the one- year interest rate is on the vertical axis of the IS- LM model and that the yield curve is initially upward sloping. If financial market participants now expect the central bank will pursue a monetary expansion in the future, we would expect which of the following to occur?

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Multiple Choice

Q56 Q56 Q56

Suppose the central bank implements monetary expansion in the current period and is not expected to continue this policy in the future. Explain what effect this policy will have on the shape of the yield curve (in terms of a one- year rate and a two- year rate) and stock prices in the current period.

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Essay

Q65 Q65 Q65

Suppose there is a report that the unemployment rate unexpectedly increased in the previous month. To what extent will the expected central bank response to this news affect how stock prices will respond to this report of a higher than expected unemployment rate? Explain.

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