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Recitation3_Chapter5_MB_fa11

# Recitation3_Chapter5_MB_fa11 - Do you get the same effect...

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Money and Banking (Fall 2011) Recitation #3 on Thursday (9/29) Chapter 5: 1. (Pages 109-114 from text.) In lecture we have focused on the determination of interest rates by looking at bond markets. Alternatively, you can look at the demand and supply of money. This is something that you have done in your principles course. The following questions will help you to review this material. a. Graphically represent the demand curve for money (M d ) and the supply curve for money (M s ). Explain why they have the shape/slope that you have represented. b. Suppose there is a decrease in the price level. How would this affect the interest rate in the market for money? c. Using the market for money graphically depict the effect of a recession (decrease in income) on the interest rate. d. How would the sale of bonds by the Federal Reserve affect interest rates, using the market for money? e. Graphically depict the sale of bonds by the Federal Reserve in the market for bonds.
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Unformatted text preview: Do you get the same effect on interest rates, as in part d? Chapter 4 and 5: 2. On 9/17/08 the 3-month Treasury bill rate became negative at some points during the day. The last time this happened in the US was in 1940! Recall, T-bills are discount bonds. To understand the workings of this event, answer the following questions. (As always, assume that the face value on the bonds is \$1000.) a. Suppose you have a discount bond with one year to maturity. For the yield on the bond to be negative, what must the price of the bond be? b. Suppose you have an 8% coupon bond that makes annual coupon payments and has three years to maturity. For the yield to be zero what price must the bond be selling at? What must the price be for the yield to be negative? c. Use the demand and supply for bonds framework to graphically depict this situation....
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