ps2_with answers_311 - METU, FEAS ECON 311 SA : Hatice pek...

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METU, FEAS ECON 311 SA : Hatice İ pek Fall 2009 TA: Nutiye Seçkin Inst: Elif Akbostanc ı PROBLEM SET II 1. Explain why you would be more or less willing to buy a real estate under the following cases: a) You expect Galatasaray stock to double in value next year. b) You expect real estate housing prices to fall. c) Prices in the stock market become more volatile. d) You expect interest rates to rise e) You expect inflation to rise, and real estate prices tend to move with the aggregate price level. f) Your wealth falls g) The bond and stock market becomes more liquid relative to the real estate market h) You expect gold to appreciate in value. i) Real estate commissions fall 2. What happens to bond prices if income taxes increase? Why? 3. In the liquidity preference framework for interest rate determination, what assets can wealth holders choose from? What is the "price" of money? Why? 4. Using the liquidity preference framework, what will happen to interest rates if the CB increases the money supply? 5. In what conditions decrease in money supply lead to increase in interest rate? 6. Ceteris paribus , what is the effect of each of the following on bond prices: a) increase in liquidity of bonds; b) increase in the expected price of alternative assets; c) increase in the federal government deficit; d) the economy entering a recession? 7. Explain what effect a large government budget deficit might have on interest rates.
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8. How might a sudden increase in people’s expectations of future real estate prices affect interest rates? Explain using asset market and liquidity preference framework. 9. An important way in which the Central Bank decreases the money supply is by selling bonds to the public. Using a supply and demand analysis for bonds, show what effect this action has on interest rates. Is your answer consistent with what you would expect to find with the liquidity framework? 10.
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This note was uploaded on 05/26/2010 for the course ECON 311 taught by Professor Elif during the Spring '10 term at Middle East Technical University.

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ps2_with answers_311 - METU, FEAS ECON 311 SA : Hatice pek...

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