Quiz 1.docx - ECON351 Quiz 1 100 points in total...

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ECON351 Quiz 1 – 100 points in total Instructions Type your answer to each question and submit this file on Canvas. If you do not submit this file and handwrite your answers instead, you will lose 10% of the credit available for this assignment. Add your name to the name of this file when submitting it. Make it clear which part of your answers is for which question. There is no restriction on the length of your answer. However, five lines would be more than enough for each part (1), 2), ...) of a question. Question 1 (from Ch.1) 1) (10 points) What is the typical relationship among interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds? Why are the interest rates different? Interest rates commove with rates on deposits, loans, etc. Following consumer theory, low interest rates raise consumption (e.g., buy cars, houses), while businesses invest in capital. In opposition, high interest rates encourage more savings. Interest rates on Baa corporate bonds are the highest, simply because of default risk, or the chance that companies unable meet their debt obligations. 3-month T-bills have the lowest interest thanks to their liquidity and because it is a short-term government security. Long-term
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