Practice - Chapter 4 on the Board Questions 1 The US goes from a normal economic state to a recession Draw a graph that shows the movement of the

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Chapter 4 on the Board Questions 1. The US goes from a normal economic state to a recession. Draw a graph that shows the movement of the demand and supply curve for the bond market. How do interest rates change? A recession means people have less wealth. Therefore, the demand for bonds will decrease or move to the left. Companies will downsize and therefore, they have no need to borrow and the supply of bonds will fall or shift to the left. In businesss cycle examples the supply shifts more than demand and therefore prices of bonds rise and interest rates fall. 2. Expected inflation has decreased. Draw a graph that shows the movement of the demand and supply curve for the bond market. How do interest rates change? If expected inflation decreases, prices of real assets such as housing is expected to fall. Therefore, people will take their money out of housing put it into bonds. This increases the demand of bonds and shifts the curve to the right.
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This note was uploaded on 09/07/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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Practice - Chapter 4 on the Board Questions 1 The US goes from a normal economic state to a recession Draw a graph that shows the movement of the

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