Question

1. True or False: Suppose there is a significant shock to global financial markets. As a result, there is a “flight to quality” – foreign investors flooded the US market with capital, investing in short-term government securities – T-bills3 primarily! This should lead to a DECREASE in US market interest rates.

2. True or False: The following argument is made as to the impact of baby boomers on financial markets. As the bulk of baby boomers approach retirement, there has been a realization by this group that they have insufficient retirement savings. As a result, recent capital and money markets have been awash with liquidity as the boomers “race to catch up”. This will likely reverse in the next few decades as boomers NEED cash during retirement. IF THIS ARGUMENT is plausible (and prof thinks it is) we should expect interest rates to generally rise in the future?

3. Of the following, the most likely effect of a decrease in income tax rates would be to

A. decrease the savings rate
B. decrease the supply of loanable funds4 (or capital, credit or liquidity)
C. increase interest rates

D. All of the above
E. None of the above

4. If a bank account is paying a nominal interest rate of 2.0% and inflation is expected to be 1.5% next year, what is the expected real rate of interest on the account?

Answer 1

1]

True.

Interest rates and bond prices are inversely related. Higher the bond prices. lower the interest rates and lower the bond prices, higher the interest rates

During a flight to quality, there is a huge increase in demand for US Treasury securities. As a result of the higher demand, their prices increase, causing a fall in US market interest rates.