Question

What role deres money have in the under Classical economic the Money serves as a catalyst to increase savings and, as a result, investment b) Money has a direct influence only on the level and direction of interest rate c) Money indirectly affects output, employment and inflation. d) Money has a direct influence only on potential inflation 3) When the current market rate is greater than the original coupon rate of a bond, the price of the hand will bond the price of the bond will When the current market rate is less than the original coupon rate of a) he lower than its original price: be higher than its original price b) be lower than its original price; be the same as its original price e) be the same as its original price; be the same as its original price d) be higher than its original price; be lower than its original price 6) Which of the following theories regarding the relationship between short and long term interest rates would be considered a hybrid explanation of two popular yield curve theories a) Market Segmentation (Supply/Demand) Theory. b) Preferred Habitat Theory. c) Expectations Theory. d) Liquidity Preference Theory. 7) A coupon paying bond makes annual payments of $38.00 and has 2 years remaining until maturity. The most recent quote for this bond indicates that the current market price is $892.50. What is the YTM for this bond? a) 12% b) 10% c) 7% d) 4% 8) Which of the following statements can be considered one of Keynesian theory's criticisms of Classical theory? a) It is not possible for the economy to have overall output that is at any level other than full employment output. b) An unseen force automatically leads markets to equilibrium since supply creates its own demand, so it is best to have a laissez-faire attitude toward government intervention. c) Although workers generally do not show any resistance to their wages increasing, they te be very hesitant to accept wage reductions. d) There cannot be an imbalance between the total level of investment and savings, as they will remain in constant equilibrium. The nominal interest rate minus the expected rate of inflation is defined as:

Answer 1

4. Option D is correct.

According to the classical theory, the real variables remained unchanged with the change in the money supply or price.

5. Option A is correct.

When bond coupon rate > market interest rate, the bond becomes more lucrative as an investment option for the investors which in turn increaes the demand for bond which shifts the demand for bond to the right and increasing the bond price.

6. Option A is correct.

the market segmentation or the supply and demand theory is a hybrid explanation of yield curve theories.

7. The formula for yield to maturity is given as below:

YTM =  [Annual coupon payment + {(Face value - Trading price)/number of years}] / [(Face value + Trading price )/2]

YTM = [38 + (1000 - 892.5)/2] / [(1000 + 892.50)/2]

YTM = 91.75/946.25

YTM = 0.097 convrting in to %,

YTM = 9.7 this can be approx to 10%

Option B is correct.