ECON110B Summer Session II 2007 Professor Dong Heon Kim Problem Set #3(due at 11:00 am on September 4, 2007) 1. For each of the following, determine whether there is a shift in the IScurve, the LMcurve, either curves, or neither. In each case, assume that expected current and future inflation are equal to zero, and that no other exogenous variable is changing. (30 points) a. A decrease in the expected future real interest rate. b. An increase in the current money supply c. An increase in expected future taxes. d. A decrease in expected future income. 2. Consider two bonds, one issued in euros in Germany, and one issued in dollars in the United States. Assume that both government securities are one-year bonds⎯paying the face value of the bond one year from now. The exchange rate, E, stands at 1 dollar = 0.75 euros. The face values and prices on the two bonds are given by (40 points) Face Value Price United States 1-year bond $10,000 $9,615.38 Germany 1-year bond 10,000 euros 9,433.96 euros a. Compute the nominal interest rate on each of the bonds.
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