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PACh5-6

# PACh5-6 - Econ 520(Spring 2007 Answers to Problems for...

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Econ 520 (Spring 2007) Answers to Problems for Chapters 5-6 Masao Ogaki CHAPTER 5 2. Multiple-Choice Problems There were important typos for the °rst problem. Here is the corrected version. 1. When prices in the stock market become more uncertain, the demand curve for bonds (with the price of bonds on the vertical axis) shifts to the ______ and the interest rate ______ . A) right; rises B) right; falls C) left; falls D) left; rises 1-B; 2-B; 3. Short Answer/Essay Problems (1) A sudden increase in volatility of stock prices means that bonds are relatively safer and this causes the demand curve for bonds to shift to right. The price of the bond will rise as in the following °gure. Therefore, the interest rate will fall. Price of Bonds, P Quantity of Bonds 1 2 - B d B s ° ° ° ° ° ° ° ° ° @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ - 6 1

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(2) A sudden fall in brokerage commissions on stocks means that bonds are relatively less liquid and this causes the demand curve for bonds to shift to the left. The price of the bond will fall as in the following °gure. Therefore, the interest rate will rise.
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