SOLUTION MANUAL FOR
M M
Money,MBanking,MFinancialMMarketsM&MInstitutionsM2ndMEditionMforMBrandlMMichael
ChapterM2-24
CHAPTERM2:MMoney,MMoneyMSupply,MandMInterest
2-1 MSectionMReview
1. WhatMisMtheMdifferenceMbetweenMmoneyMandMcurrency?MWhenMareMtheyMtheMsame?MWhyMmightMt
heyMbeMdifferent?
ANS:MMoneyMisManythingMgenerallyMacceptedMinMexchangeMforMgoodsM&Mservices.MCurrencyMisMissuedMby
MaMbankMorMtheMgovernment,MbutMcurrencyMisMnotMnecessarilyMmoney.MTheyMareMtheMsameMwhenMtheyM
are
acceptedMinMexchangeMforMgoodsMandMservices.MCurrenciesMcanMstopMbeingMmoneyMifMpeopleMdon’tMacce
ptMthemMinMexchangeMforMgoodsMandMservices.MIfMaMgroupMofMpeopleMstopMusingMcurrencyMtoMgetMgoods
MandMservicesMbutMinsteadMuseMbananas,MthenMtheMbananasMareMtheMmoney.
2. HowMmanyMpricesMmustMaMbarterMeconomyMhaveMifMtheMeconomyMhasMfourMgoods?MWhatMifMitMh
asM400Mgoods?MExplainMwhyMhavingMaMmoneyMinMtheMsecondMcaseMisMbeneficial.
ANS:M4MgoodsM=M6Mprices;M400MgoodsM=M79,800Mprices.MMoneyMallowsMusMtoMspecializeMandMreduceMour
MsearchMcost.M MoneyMallowsMusMtoMreduceMtheMnumberMofMstatedMpricesMweMneed.
3. YouMreadMaMnewsMstoryMaboutMaMcountryMthatMisMsufferingMfromMrapid,MongoingMincreasesMinMtheM
costMofMliving.MWhichMcharacteristicMofMmoneyMisMbeingMdirectlyMnegativelyMimpactedMinMthatMecono
my?
a. UnitMofMaccount
b. MediumMofMexchange
c. StoreMofMvalue
d. DoubleMcoincidenceMofMwant
sMANS:M C
2-2 MSectionMReview
1. BobbyMisMconfused.MHeMstates:M“SinceMprisonersMareMnotMallowedMtoMsmokeMinMprisonsManyMlonge
r,MRadford’sM examplesMofMcigarettesMinMPOWMcampsMnoMlongerMapplies.”MHowMwouldMyouMexplainMt
oMBobbyMhowMRadford’sMstoryMdemonstratesMtheMconceptsMofMtheMcriteriaMofMmoney,MasMwellMasMth
eMimportanceMofMchangesMinMtheMmoneyMsupply?
ANS:M AnyMassetMthatMisMableMtoMbeMstandardized,Mdivisible,MdurableMandMinMdemandMcouldMbeMcurrenc
y,MasMlongMasMitMisMaMmediumMofMexchange,MisMaMunitMofMaccountMandMhasMstoreMofMvalue.M CigarettesMw
ereMmoney.
,2. ProponentsMofMtheMGoldMStandard,MorMusingMgoldMasMmoney,MoftenMargueMthatMitMwillMkeepMinflation
MunderMcontrol.MHowMdoesMtheMexperienceMofMEuropeMinMtheMsixteenthMcenturyMraiseMdoubtsMaboutMth
atMclaim?
ANS:M IfMpeopleMstartMtoMhoardMgoldMorMsilver,MthereMmayMnotMbeMenoughMmoney,MandManMeconomyMco
uldMslideMintoMrecession.M IfMgoldMorMsilverMincreasesMtooMrapidlyMtheMeconomyMcouldMsufferMinflation.
3. RicardoMandMFriedmanMagreeMthatMifMtheMmoneyMsupplyMincreasesM“tooMquickly”MtheMfollowingMhappens:
a. TheMrateMofMinflationMdecreases.
b. TheMrateMofMrealMeconomicMgrowthMincreases.
c. TheMrateMofMinflationMincreases.
d. TheMlevelMofMemploymentMdecreases.
ANS:MC
2-3 MSectionMReview
1. AMcriticMofMmoneyMeconomicsMonceMstated,M“ifMyouMcannotMmeasureMtheMmoneyMsupplyMaccuratel
y,MitMisMnotMworthMdiscussingMatMall.”MHowMwouldMyouMrefuteMthisMstatement?
ANS:MDueMtoMchangesMinMfinancialMmarkets,MfinancialMinnovationMandMchangesMinMtheMwayMbanksMoper
ate,MledMtoMtheMdeclineMinMtheMusefulnessMofMM2MasMaMmonetaryMaggregate.
2. EconomistsMareMsearchingMforMaM“good”MmeasurementMofMtheMmoneyMsupply.MWhatMconstitutesMa
MgoodMmeasurementMofMtheMmoneyMsupply?
ANS:MToMeconomists,MaM“good”MmeasurementMofMtheMmoneyMsupplyMisMoneMthatMconformsMtoMeconomi
cMtheoriesMregardingMinflationMandMtheMeconomy.MForMexample,MifMtheMmoneyMsupplyM(accordingMtoMaM
particularMmeasurement)MincreasesMfasterMthanMtheMgrowthMrateMofMtheMeconomy,MthenMeconomicMthe
oryMsuggestsMthatMinflationMshouldMoccur.MOnMtheMotherMhand,MifMtheMmoneyMsupplyM(accordingMtoMaMp
articularMmeasurement)MincreasesMtooMslowlyMrelativeMtoMtheMgrowthMrateMofMtheMeconomy,MthenMecon
omicMtheoryMsuggestsMthatMthisMwillMresultMinMaMrecession.MWhenMtheMmeasurementMofMtheMmoneyMsup
plyMcoincidesMwithMtheseMeconomicMpredictions,MthenMthatMparticularMmeasurementMhasMtheMpotentialM
toMbeMaM“good”MmeasurementMofMtheMmoneyMsupply.MDuringMcertainMperiodsMofMtime,MbothMM1MandM
M2MhaveMbeenMconsideredMtoMbeM“good”MmeasurementsMofMtheMmoneyMsupply.MHowever,MthereMhaveM
alsoMbeenMperiodsMofMtimeMwhereMtheMchangesMinMM1MorMM2MdidMnotMcoincideMwithMeconomicMtheory.
3. WhichMofMtheMfollowingMisMtheMbroadestMorMmostMinclusiveMmeasurementMofMtheMmoneyMsupply?
a. M1
b. M2
c. M3
d. M0
ANS:M B
,2-4 MSectionMReview
1. EachMpersonMmightMhaveMaMdifferentMtimeMpreference.MExplainMwhyManMolderMpersonMmightMhaveMaM
higherMorMlowerMtimeMpreferenceMthanMaMyoungMperson.
ANS:MAnMolderMpersonMmightMhaveMaMhighMtimeMpreference,MconsumerMnowMvs.MinMtheMfuture.M TheMold
erMpersonMwillMplaceMhigherMvalueMonMtheMabilityMtoMconsumeMnowMmoreMthanMmoneyMinMtheMfuture.
2. WhatMisMtheMfutureMvalueMofM$500MinMtwoMyearsMifMtheMinterestMrateMisM4%?MHowMwouldMyouMexplai
nMthisMtoMsomeoneMwhoMhasMnoMtrainingMinMeconomics?
ANS:M500(1.04)2M=M$540.80.MForMsomeoneMwithoutMaMbackgroundMinMeconomics,MoneMcouldMexplainMth
atMmoneyMinvestedMtodayMwillMgrowMoverMtime.MThus,MinMorderMtoMhaveM$500MinMtheMfuture,MtodayMyo
uMwouldMonlyMneedMtoMinvestMsomeMamountMthatMisMlessMthanM$500.MHowMmuchMlessMdependsMonMtheM
returnMonMyourMinvestmentM(theMinterestMrate).
3. IfMtheMannualMinterestMrateMisM2%,MwhatMisMtheMquarterlyMinterestMrate?
a. 0.0204
b. 0.0166
c. 0.005
d. 0.001
ANS:M C
CHAPTERM3:MBondsMandMLoanableMFunds
3-1 MSectionMReview
1. Today,MshoppersM“clipMcoupons”MbeforeMtheyMgoMshopping.MExplainMhowMtheseMmodernMcoupon
sMareMsimilarMandMdissimilarMtoMtheM“coupons”MreferredMtoMinMtheMbondMmarket.
ANS:MToday,Mthough,MmostMbondsMareMnotMphysicalMprintedMpiecesMofMpaperMwithMcouponsMthatMmustM
beMclippedMoffMandMmailedMtoMtheMissuer.
2. TheMfactMthatMtheMfaceMvalueMofMaMbondMdoesMnotMchangeMoverMtheMlifeMofMtheMbondMisMg
enerallyMconsideredMaMbenefitMtoMtheMborrower.MCanMyouMexplainMwhy?
ANS:MIfMtheMmarketMconditionsMchange,MsayMratesMdrop,MtheMfaceMvalueMwillMnotMchange.
3. TheMrateMofMinterestMaMbondMpaysMisMcalledMtheMbond’s:
a. faceMvalue.
b. couponMrate.
c. bondMrating.
d. ratingMrate.
, ANS:M B
3-2 MSectionMReview
1. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.25%,MbutMtheMmarketM
interestMrateMforMsuchMbondsMisM2.5%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscount?
MExplainMwhy.
ANS:MWhenMmarketMinterestMratesMriseMrelativeMtoMcouponMratesMonMexistingMbonds,MtheMpriceMofMthes
eMexistingMbondsMdecreaseMbelowMfaceMvalue.MThisMmeansMthatMthisMbondMwillMbeMsoldMatMaMdiscount,Msi
nceMtheMmarketMpriceMisMbelowMtheMfaceMvalueMofMtheMbond.
2. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.5%,MbutMtheMmarketM
interestMrateMforMsuchMbondsMisM2.25%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscou
nt?MExplainMwhy.
ANS:MPremiumMbecauseMtheMcouponMrateMisMlessMthanMtheMmarketMrate.
3. IfMaMthree-
yearMbondMwithMaM$1,000MfaceMvalueMhasMaMcouponMrateMofM3.5%,MandMtheMcurrentMmarketMinter
estMrateMisM2%,MwhatMisMtheMmarketMpriceMofMtheMbond?
a. $956.75
b. $1,035.00
c. $1,043.30
d. $1,148.34
MANS:M c
3-3 MSectionMReview
1. YouMreadMinMtheMfinancialMpressMthatMmarketMparticipantsMexpectMstockMpricesMtoMincreaseMdramatic
allyMinMtheMnearMfuture,MwhileMatMtheMsameMtimeMbusinessMconfidenceMisMincreasing.MExplainMinMwordsM
andMshowMgraphicallyMwhatMwillMhappenMinMtheMbondMmarketMifMtheMfirstMchangeMisMlargerMinMmagnitu
deMthanMtheMsecond.
ANS:MStocksMandMbondsMareMconsideredMsubstitutes,MtheMreturnMonMholdingMstocksMareMgoingMtoMincre
ase,MyouMdoMnotMwantMtoMholdMbonds.M DemandMforMbondsMwillMfall,MrelativeMreturnMtoMbondsMisMdecli
ning.
BusinessMconfidenceMisMincreasingMsoMfirmsMareMgoingMtoMfundMmoreMprojects.M TheyMwillMneedMtoMborr
owMmoreMmoney,MorMsellMmoreMbondsMtoMraiseMthoseMfunds.M TheMsupplyMofMbondsMisMincreasing.M DueM
toMtheMdecreaseMinMdemandMforMbondsMisMbiggerMthanMtheMsecond,MweMcanMconcludeMequilibriumMprice
MwillMfallMandMequilibriumMquantityMwillMincrease.
2. StoriesMappearMinMtheMfinancialMpressMreportingMtwoMeconomicMdevelopments:MWealthMlevelsMinMt
heMUnitedMStatesMareMincreasing,MwhileMatMtheMsameMtimeMtheMrelativeMriskinessMofMbondsMissuedMbyM
AmericanMcorporationsMisMdecreasing.MExplainMinMwordsMwhatMwillMhappenMinMtheMUSMbondMmarketMb
ecauseMofMtheseMtwoMevents.
ANS:MIncreasingMwealthMlevelsMcauseManMincreaseMinMtheMdemandMforMbondsMbecauseMhouseholdsMcan
MuseMthisMwealthMnotMonlyMtoMincreaseMconsumptionMbutMalsoMsave.MSomeMportionMofMtheseMnewMsavi
ngs willMinto
itsMway findMtheMbondMmarketMasMhouseholdsMwillMpurchaseMmoreMbondsMatMeveryMprice.MAtMtheMsam
eifMtime,
defaultMriskMdecreases,MsaversMwillMbuyMmoreMbondsMasMtheyMareMconsideredMaMrelativelyMsaferMass
et. So,
M M
Money,MBanking,MFinancialMMarketsM&MInstitutionsM2ndMEditionMforMBrandlMMichael
ChapterM2-24
CHAPTERM2:MMoney,MMoneyMSupply,MandMInterest
2-1 MSectionMReview
1. WhatMisMtheMdifferenceMbetweenMmoneyMandMcurrency?MWhenMareMtheyMtheMsame?MWhyMmightMt
heyMbeMdifferent?
ANS:MMoneyMisManythingMgenerallyMacceptedMinMexchangeMforMgoodsM&Mservices.MCurrencyMisMissuedMby
MaMbankMorMtheMgovernment,MbutMcurrencyMisMnotMnecessarilyMmoney.MTheyMareMtheMsameMwhenMtheyM
are
acceptedMinMexchangeMforMgoodsMandMservices.MCurrenciesMcanMstopMbeingMmoneyMifMpeopleMdon’tMacce
ptMthemMinMexchangeMforMgoodsMandMservices.MIfMaMgroupMofMpeopleMstopMusingMcurrencyMtoMgetMgoods
MandMservicesMbutMinsteadMuseMbananas,MthenMtheMbananasMareMtheMmoney.
2. HowMmanyMpricesMmustMaMbarterMeconomyMhaveMifMtheMeconomyMhasMfourMgoods?MWhatMifMitMh
asM400Mgoods?MExplainMwhyMhavingMaMmoneyMinMtheMsecondMcaseMisMbeneficial.
ANS:M4MgoodsM=M6Mprices;M400MgoodsM=M79,800Mprices.MMoneyMallowsMusMtoMspecializeMandMreduceMour
MsearchMcost.M MoneyMallowsMusMtoMreduceMtheMnumberMofMstatedMpricesMweMneed.
3. YouMreadMaMnewsMstoryMaboutMaMcountryMthatMisMsufferingMfromMrapid,MongoingMincreasesMinMtheM
costMofMliving.MWhichMcharacteristicMofMmoneyMisMbeingMdirectlyMnegativelyMimpactedMinMthatMecono
my?
a. UnitMofMaccount
b. MediumMofMexchange
c. StoreMofMvalue
d. DoubleMcoincidenceMofMwant
sMANS:M C
2-2 MSectionMReview
1. BobbyMisMconfused.MHeMstates:M“SinceMprisonersMareMnotMallowedMtoMsmokeMinMprisonsManyMlonge
r,MRadford’sM examplesMofMcigarettesMinMPOWMcampsMnoMlongerMapplies.”MHowMwouldMyouMexplainMt
oMBobbyMhowMRadford’sMstoryMdemonstratesMtheMconceptsMofMtheMcriteriaMofMmoney,MasMwellMasMth
eMimportanceMofMchangesMinMtheMmoneyMsupply?
ANS:M AnyMassetMthatMisMableMtoMbeMstandardized,Mdivisible,MdurableMandMinMdemandMcouldMbeMcurrenc
y,MasMlongMasMitMisMaMmediumMofMexchange,MisMaMunitMofMaccountMandMhasMstoreMofMvalue.M CigarettesMw
ereMmoney.
,2. ProponentsMofMtheMGoldMStandard,MorMusingMgoldMasMmoney,MoftenMargueMthatMitMwillMkeepMinflation
MunderMcontrol.MHowMdoesMtheMexperienceMofMEuropeMinMtheMsixteenthMcenturyMraiseMdoubtsMaboutMth
atMclaim?
ANS:M IfMpeopleMstartMtoMhoardMgoldMorMsilver,MthereMmayMnotMbeMenoughMmoney,MandManMeconomyMco
uldMslideMintoMrecession.M IfMgoldMorMsilverMincreasesMtooMrapidlyMtheMeconomyMcouldMsufferMinflation.
3. RicardoMandMFriedmanMagreeMthatMifMtheMmoneyMsupplyMincreasesM“tooMquickly”MtheMfollowingMhappens:
a. TheMrateMofMinflationMdecreases.
b. TheMrateMofMrealMeconomicMgrowthMincreases.
c. TheMrateMofMinflationMincreases.
d. TheMlevelMofMemploymentMdecreases.
ANS:MC
2-3 MSectionMReview
1. AMcriticMofMmoneyMeconomicsMonceMstated,M“ifMyouMcannotMmeasureMtheMmoneyMsupplyMaccuratel
y,MitMisMnotMworthMdiscussingMatMall.”MHowMwouldMyouMrefuteMthisMstatement?
ANS:MDueMtoMchangesMinMfinancialMmarkets,MfinancialMinnovationMandMchangesMinMtheMwayMbanksMoper
ate,MledMtoMtheMdeclineMinMtheMusefulnessMofMM2MasMaMmonetaryMaggregate.
2. EconomistsMareMsearchingMforMaM“good”MmeasurementMofMtheMmoneyMsupply.MWhatMconstitutesMa
MgoodMmeasurementMofMtheMmoneyMsupply?
ANS:MToMeconomists,MaM“good”MmeasurementMofMtheMmoneyMsupplyMisMoneMthatMconformsMtoMeconomi
cMtheoriesMregardingMinflationMandMtheMeconomy.MForMexample,MifMtheMmoneyMsupplyM(accordingMtoMaM
particularMmeasurement)MincreasesMfasterMthanMtheMgrowthMrateMofMtheMeconomy,MthenMeconomicMthe
oryMsuggestsMthatMinflationMshouldMoccur.MOnMtheMotherMhand,MifMtheMmoneyMsupplyM(accordingMtoMaMp
articularMmeasurement)MincreasesMtooMslowlyMrelativeMtoMtheMgrowthMrateMofMtheMeconomy,MthenMecon
omicMtheoryMsuggestsMthatMthisMwillMresultMinMaMrecession.MWhenMtheMmeasurementMofMtheMmoneyMsup
plyMcoincidesMwithMtheseMeconomicMpredictions,MthenMthatMparticularMmeasurementMhasMtheMpotentialM
toMbeMaM“good”MmeasurementMofMtheMmoneyMsupply.MDuringMcertainMperiodsMofMtime,MbothMM1MandM
M2MhaveMbeenMconsideredMtoMbeM“good”MmeasurementsMofMtheMmoneyMsupply.MHowever,MthereMhaveM
alsoMbeenMperiodsMofMtimeMwhereMtheMchangesMinMM1MorMM2MdidMnotMcoincideMwithMeconomicMtheory.
3. WhichMofMtheMfollowingMisMtheMbroadestMorMmostMinclusiveMmeasurementMofMtheMmoneyMsupply?
a. M1
b. M2
c. M3
d. M0
ANS:M B
,2-4 MSectionMReview
1. EachMpersonMmightMhaveMaMdifferentMtimeMpreference.MExplainMwhyManMolderMpersonMmightMhaveMaM
higherMorMlowerMtimeMpreferenceMthanMaMyoungMperson.
ANS:MAnMolderMpersonMmightMhaveMaMhighMtimeMpreference,MconsumerMnowMvs.MinMtheMfuture.M TheMold
erMpersonMwillMplaceMhigherMvalueMonMtheMabilityMtoMconsumeMnowMmoreMthanMmoneyMinMtheMfuture.
2. WhatMisMtheMfutureMvalueMofM$500MinMtwoMyearsMifMtheMinterestMrateMisM4%?MHowMwouldMyouMexplai
nMthisMtoMsomeoneMwhoMhasMnoMtrainingMinMeconomics?
ANS:M500(1.04)2M=M$540.80.MForMsomeoneMwithoutMaMbackgroundMinMeconomics,MoneMcouldMexplainMth
atMmoneyMinvestedMtodayMwillMgrowMoverMtime.MThus,MinMorderMtoMhaveM$500MinMtheMfuture,MtodayMyo
uMwouldMonlyMneedMtoMinvestMsomeMamountMthatMisMlessMthanM$500.MHowMmuchMlessMdependsMonMtheM
returnMonMyourMinvestmentM(theMinterestMrate).
3. IfMtheMannualMinterestMrateMisM2%,MwhatMisMtheMquarterlyMinterestMrate?
a. 0.0204
b. 0.0166
c. 0.005
d. 0.001
ANS:M C
CHAPTERM3:MBondsMandMLoanableMFunds
3-1 MSectionMReview
1. Today,MshoppersM“clipMcoupons”MbeforeMtheyMgoMshopping.MExplainMhowMtheseMmodernMcoupon
sMareMsimilarMandMdissimilarMtoMtheM“coupons”MreferredMtoMinMtheMbondMmarket.
ANS:MToday,Mthough,MmostMbondsMareMnotMphysicalMprintedMpiecesMofMpaperMwithMcouponsMthatMmustM
beMclippedMoffMandMmailedMtoMtheMissuer.
2. TheMfactMthatMtheMfaceMvalueMofMaMbondMdoesMnotMchangeMoverMtheMlifeMofMtheMbondMisMg
enerallyMconsideredMaMbenefitMtoMtheMborrower.MCanMyouMexplainMwhy?
ANS:MIfMtheMmarketMconditionsMchange,MsayMratesMdrop,MtheMfaceMvalueMwillMnotMchange.
3. TheMrateMofMinterestMaMbondMpaysMisMcalledMtheMbond’s:
a. faceMvalue.
b. couponMrate.
c. bondMrating.
d. ratingMrate.
, ANS:M B
3-2 MSectionMReview
1. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.25%,MbutMtheMmarketM
interestMrateMforMsuchMbondsMisM2.5%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscount?
MExplainMwhy.
ANS:MWhenMmarketMinterestMratesMriseMrelativeMtoMcouponMratesMonMexistingMbonds,MtheMpriceMofMthes
eMexistingMbondsMdecreaseMbelowMfaceMvalue.MThisMmeansMthatMthisMbondMwillMbeMsoldMatMaMdiscount,Msi
nceMtheMmarketMpriceMisMbelowMtheMfaceMvalueMofMtheMbond.
2. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.5%,MbutMtheMmarketM
interestMrateMforMsuchMbondsMisM2.25%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscou
nt?MExplainMwhy.
ANS:MPremiumMbecauseMtheMcouponMrateMisMlessMthanMtheMmarketMrate.
3. IfMaMthree-
yearMbondMwithMaM$1,000MfaceMvalueMhasMaMcouponMrateMofM3.5%,MandMtheMcurrentMmarketMinter
estMrateMisM2%,MwhatMisMtheMmarketMpriceMofMtheMbond?
a. $956.75
b. $1,035.00
c. $1,043.30
d. $1,148.34
MANS:M c
3-3 MSectionMReview
1. YouMreadMinMtheMfinancialMpressMthatMmarketMparticipantsMexpectMstockMpricesMtoMincreaseMdramatic
allyMinMtheMnearMfuture,MwhileMatMtheMsameMtimeMbusinessMconfidenceMisMincreasing.MExplainMinMwordsM
andMshowMgraphicallyMwhatMwillMhappenMinMtheMbondMmarketMifMtheMfirstMchangeMisMlargerMinMmagnitu
deMthanMtheMsecond.
ANS:MStocksMandMbondsMareMconsideredMsubstitutes,MtheMreturnMonMholdingMstocksMareMgoingMtoMincre
ase,MyouMdoMnotMwantMtoMholdMbonds.M DemandMforMbondsMwillMfall,MrelativeMreturnMtoMbondsMisMdecli
ning.
BusinessMconfidenceMisMincreasingMsoMfirmsMareMgoingMtoMfundMmoreMprojects.M TheyMwillMneedMtoMborr
owMmoreMmoney,MorMsellMmoreMbondsMtoMraiseMthoseMfunds.M TheMsupplyMofMbondsMisMincreasing.M DueM
toMtheMdecreaseMinMdemandMforMbondsMisMbiggerMthanMtheMsecond,MweMcanMconcludeMequilibriumMprice
MwillMfallMandMequilibriumMquantityMwillMincrease.
2. StoriesMappearMinMtheMfinancialMpressMreportingMtwoMeconomicMdevelopments:MWealthMlevelsMinMt
heMUnitedMStatesMareMincreasing,MwhileMatMtheMsameMtimeMtheMrelativeMriskinessMofMbondsMissuedMbyM
AmericanMcorporationsMisMdecreasing.MExplainMinMwordsMwhatMwillMhappenMinMtheMUSMbondMmarketMb
ecauseMofMtheseMtwoMevents.
ANS:MIncreasingMwealthMlevelsMcauseManMincreaseMinMtheMdemandMforMbondsMbecauseMhouseholdsMcan
MuseMthisMwealthMnotMonlyMtoMincreaseMconsumptionMbutMalsoMsave.MSomeMportionMofMtheseMnewMsavi
ngs willMinto
itsMway findMtheMbondMmarketMasMhouseholdsMwillMpurchaseMmoreMbondsMatMeveryMprice.MAtMtheMsam
eifMtime,
defaultMriskMdecreases,MsaversMwillMbuyMmoreMbondsMasMtheyMareMconsideredMaMrelativelyMsaferMass
et. So,
