Assign_1-Ak - Money, Banking, & Financial Markets...

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Assignment # 1 (Due by 12:00 noon, Monday, June 11) Q.1 Liquidity Preference Framework and Loanable Fund Framework are one and same thing (T/F). Explain. False. The two are closely linked, but differ in practice because liquidity preference assumes only two assets, money and bonds, and ignores effects on interest rates from changes in expected returns on real assets. Supply is equal to demand for bonds as in loanable funds framework is equivalent to Supply equals to demand for money as in liquidity preference framework. Money Market Equilibrium Occurs when Md = Ms Md – Ms = 0 which implies that Bd – Bs = 0, so that Bd = Bs bond market is also in equilibrium The Bond Framework is easier to use when analyzing the effects from changes in expected inflation. While the liquidity preference provides a simpler analysis of the effects from changes in income, price levels, and supply of money . Q.2 Demand for loanable funds is same as supply of bonds (T/F). Explain. True. When businesses expand they need more funds to complete their projects in a timely manner. They issue bonds to raise these required funds and offer good return on these bonds. As the price of bond increases the demand goes down but
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those supplying these bond (or in other words demanding loanable funds) supply more bonds at rising prices because interest rate falls as price of bond rises and the cost of borrowing these bonds goes down.
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This note was uploaded on 10/12/2009 for the course ECON 210 taught by Professor Mohammadakbar during the Fall '09 term at Simon Fraser.

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Assign_1-Ak - Money, Banking, & Financial Markets...

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