frl315 exam guid 2 - LECTURE 3 OUTLINE YIELD CURVE...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Answers to “Advanced Questions” Chapter 2 11. Impact of Stock Market Crises. During periods in which investors suddenly become fearful that stocks are overvalued, they dump their stocks, and the stock market experiences a major decline. During these periods, interest rates tend to decline. Use the loanable funds framework discussed in this chapter to explain how the massive selling of stocks leads to lower interest rates. ANSWER: When investors shift funds out of stocks, they move it into money market securities, causing an increase in the supply of loanable funds, and lower interest rates. 14. Impact of War. A war tends to cause significant reactions in financial markets. Why would a war in Iraq place upward pressure on U.S. interest rates? Why might some investors expect a war like this to place downward pressure on U.S. interest rates? ANSWER: The Persian Gulf crisis placed upward pressure on U.S. interest rates because it (1) increased inflationary expectations in the United States as oil prices increased abruptly, and (2) increased the expected U.S. budget deficit as government expenditures were necessary to boost military support. However, the crisis also caused some analysts to revise their forecasts of economic growth downward. In fact, some analysts predicted that a U.S. recession would occur. The slower economy reflects a reduced corporate demand for funds, which by itself places downward pressure on interest rates. If inflation was not a concern, the Fed may attempt to increase money supply growth to stimulate the economy. However, the inflationary pressure restricted the Fed from stimulating the
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/28/2008 for the course FINANCE frl 315 taught by Professor Tugruilavci during the Spring '08 term at Cal Poly Pomona.

Page1 / 2

frl315 exam guid 2 - LECTURE 3 OUTLINE YIELD CURVE...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online