325_PracticePS8

325_PracticePS8 - Department of Economics University of...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Practice Problem Set 8 Professor Sanjay Chugh Spring 2011 1. The Yield Curve. An important indicator of markets’ beliefs/expectations about the future path of the macroeconomy is the “yield curve,” which, simply put, describes the relationship between the maturity length of a particular bond (recall that bonds come in various maturity lengths) and the per-year interest rate on that bond. A bond’s “yield” is alternative terminology for its interest rate. A sample yield curve is shown in the following diagram: This diagram plots the yield curve for U.S. Treasury bonds that existed in markets on February 9, 2005: as it shows, a 5-year Treasury bond on that date carried an interest rate of about 4 percent, a 10-year Treasury bond on that date carried an interest rate of about 4.4 percent, and a 30-year Treasury bond on that date carried an interest rate of about 4.52 percent. Recall from our study of bond markets that prices of bonds and nominal interest rates on bonds are negatively related to each other. The yield curve is typically discussed in terms of nominal interest rates (as in the graph above). However, because of the inverse relationship between interest rates on bonds and prices of bonds, the yield curve could equivalently be discussed in terms of the prices of bonds. In this problem, you will use an enriched version of our infinite-period monetary framework from Chapter 14 to study how the yield curve is determined in the “steady state.”
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Rather than assuming the representative consumer has only one type of bond (a one-period bond) he can purchase, we will assume the representative consumer has several types of bonds he can purchase – a one-period bond, a two-period bond, and, in the later parts of the problem, a three- period bond. Let’s start just with two-period bonds. We will model the two-period bond in the simplest possible way: in period t , the consumer purchases TWO t B units of two-period bonds, each of which has a market price , bTWO t P and a face value of one (i.e., when the two-period bond pays off, it pays back one dollar).
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This document was uploaded on 11/01/2011 for the course ECON 325 at Maryland.

Page1 / 4

325_PracticePS8 - Department of Economics University of...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online