Suppose that financial market participants now expect

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Financial Markets & Institutions
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Chapter 5 / Exercise 17
Financial Markets & Institutions
Madura
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11) Suppose that financial market participants now expect a future tax cut and that the yield curve is initially upward sloping. Given this information, we would expect which of the following to occur? A) the yield curve will become steeper B) the yield curve will become flatter C) the yield curve will become horizontal D) the yield curve will become downward sloping
12) For this question, assume that the Fed is expected to respond to any event by keeping the interest rate constant (i.e., equal to its initial level). An unexpected tax cut will cause
13) For this question, assume that the Fed is expected to respond to any event by keeping output constant (i.e., equal to its initial level). An unexpected increase in taxes will cause
14) For this question, assume that the Fed is expected to respond to any event by keeping output constant (i.e., equal to its initial level). An unexpected increase in government spending will cause
15) As the LM curve becomes steeper, an unexpected increase in consumer confidence A) will cause a relatively large increase in output and relatively large increase in the interest rate. B) will cause a relatively small increase in output and relatively small increase in the interest rate. C) is more likely to cause stock prices to rise. D) is more likely to cause stock prices to fall.
Short-answer Questions.1) Explain what the term structureof interest rates represents. 2) When interpreting bond prices as present values, discuss what factors determine the price of a two-year discount bond.Include in your answer an explanation of how changes in each of these factors affects the price of a two-year discount bond.
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Chapter 5 / Exercise 17
Financial Markets & Institutions
Madura
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4 3) The yield curve indicates that the two-year interest rate

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