SOLUTION MANUAL FOR
M M
Money,MBanking,MFinancialMMarketsM&MInstitutionsM2ndMEditionMforMBrandlMMichael
ChapterM2-24
CHAPTERM2:MMoney,MMoneyMSupply,MandMInterest
2-1 SectionMReview
1. WhatMisMtheMdifferenceMbetweenMmoneyMandMcurrency?MWhenMareMtheyMtheMsame?MWhyMmightMt
heyMbeMdifferent?
ANS:MMoneyMisManythingMgenerallyMacceptedMinMexchangeMforMgoodsM&Mservices.MCurrencyMisMissued
MbyMaMbankMorMtheMgovernment,MbutMcurrencyMisMnotMnecessarilyMmoney.MTheyMareMtheMsameMwhen
MtheyMareMacceptedMinMexchangeMforMgoodsMandMservices.MCurrenciesMcanMstopMbeingMmoneyMifMpeo
pleMdon’tMacceptMthemMinMexchangeMforMgoodsMandMservices.MIfMaMgroupMofMpeopleMstopMusingMcurre
ncyMtoMgetMgoodsMandMservicesMbutMinsteadMuseMbananas,MthenMtheMbananasMareMtheMmoney.
2. HowMmanyMpricesMmustMaMbarterMeconomyMhaveMifMtheMeconomyMhasMfourMgoods?MWhatMifMitM
hasM400Mgoods?MExplainMwhyMhavingMaMmoneyMinMtheMsecondMcaseMisMbeneficial.
ANS:M4MgoodsM=M6Mprices;M400MgoodsM=M79,800Mprices.MMoneyMallowsMusMtoMspecializeMandMreduceMour
MsearchMcost.M MoneyMallowsMusMtoMreduceMtheMnumberMofMstatedMpricesMweMneed.
3. YouMreadMaMnewsMstoryMaboutMaMcountryMthatMisMsufferingMfromMrapid,MongoingMincreasesMinMthe
McostMofMliving.MWhichMcharacteristicMofMmoneyMisMbeingMdirectlyMnegativelyMimpactedMinMthatMecono
my?
a. UnitMofMaccount
b. MediumMofMexchange
c. StoreMofMvalue
d. DoubleMcoincidenceMofMwan
tsMANS:MC
2-2 SectionMReview
1. BobbyMisMconfused.MHeMstates:M“SinceMprisonersMareMnotMallowedMtoMsmokeMinMprisonsManyMlonger,
Radford’sMexamplesMofMcigarettesMinMPOWMcampsMnoMlongerMapplies.”MHowMwouldMyouMexplainMtoM
BobbyMhowMRadford’sMstoryMdemonstratesMtheMconceptsMofMtheMcriteriaMofMmoney,MasMwellMasMtheMi
mportanceMofMchangesMinMtheMmoneyMsupply?
ANS:MAnyMassetMthatMisMableMtoMbeMstandardized,Mdivisible,MdurableMandMinMdemandMcouldMbeMcurren
cy,MasMlongMasMitMisMaMmediumMofMexchange,MisMaMunitMofMaccountMandMhasMstoreMofMvalue.M Cigarette
sMwereMmoney.
,2. ProponentsMofMtheMGoldMStandard,MorMusingMgoldMasMmoney,MoftenMargueMthatMitMwillMkeepMinflation
MunderMcontrol.MHowMdoesMtheMexperienceMofMEuropeMinMtheMsixteenthMcenturyMraiseMdoubtsMaboutMth
atMclaim?
ANS:MIfMpeopleMstartMtoMhoardMgoldMorMsilver,MthereMmayMnotMbeMenoughMmoney,MandManMeconomy
McouldMslideMintoMrecession.M IfMgoldMorMsilverMincreasesMtooMrapidlyMtheMeconomyMcouldMsufferMinflat
ion.
3. RicardoMandMFriedmanMagreeMthatMifMtheMmoneyMsupplyMincreasesM“tooMquickly”MtheMfollowingMhappen
s:
a. TheMrateMofMinflationMdecreases.
b. TheMrateMofMrealMeconomicMgrowthMincreases.
c. TheMrateMofMinflationMincreases.
d. TheMlevelMofMemploymentMdecreases.
ANS:MC
2-3 SectionMReview
1. AMcriticMofMmoneyMeconomicsMonceMstated,M“ifMyouMcannotMmeasureMtheMmoneyMsupplyMaccuratel
y,MitMisMnotMworthMdiscussingMatMall.”MHowMwouldMyouMrefuteMthisMstatement?
ANS:MDueMtoMchangesMinMfinancialMmarkets,MfinancialMinnovationMandMchangesMinMtheMwayMbanksMop
erate,MledMtoMtheMdeclineMinMtheMusefulnessMofMM2MasMaMmonetaryMaggregate.
2. EconomistsMareMsearchingMforMaM“good”MmeasurementMofMtheMmoneyMsupply.MWhatMconstitutesMa
MgoodMmeasurementMofMtheMmoneyMsupply?
ANS:MToMeconomists,MaM“good”MmeasurementMofMtheMmoneyMsupplyMisMoneMthatMconformsMtoMecono
micMtheoriesMregardingMinflationMandMtheMeconomy.MForMexample,MifMtheMmoneyMsupplyM(accordingMto
MaMparticularMmeasurement)MincreasesMfasterMthanMtheMgrowthMrateMofMtheMeconomy,MthenMeconomic
MtheoryMsuggestsMthatMinflationMshouldMoccur.MOnMtheMotherMhand,MifMtheMmoneyMsupplyM(accordingMt
oMaMparticularMmeasurement)MincreasesMtooMslowlyMrelativeMtoMtheMgrowthMrateMofMtheMeconomy,Mthe
nMeconomicMtheoryMsuggestsMthatMthisMwillMresultMinMaMrecession.MWhenMtheMmeasurementMofMtheMmo
neyMsupplyMcoincidesMwithMtheseMeconomicMpredictions,MthenMthatMparticularMmeasurementMhasMtheMp
otentialMtoMbeMaM“good”MmeasurementMofMtheMmoneyMsupply.MDuringMcertainMperiodsMofMtime,MbothM
M1MandMM2MhaveMbeen
consideredMtoMbeM“good”MmeasurementsMofMtheMmoneyMsupply.MHowever,MthereMhaveMalsoMbeenMperi
odsMofMtimeMwhereMtheMchangesMinMM1MorMM2MdidMnotMcoincideMwithMeconomicMtheory.
3. WhichMofMtheMfollowingMisMtheMbroadestMorMmostMinclusiveMmeasurementMofMtheMmoneyMsupply?
a. M1
b. M2
c. M3
d. M0
ANS:M B
,2-4 SectionMReview
1. EachMpersonMmightMhaveMaMdifferentMtimeMpreference.MExplainMwhyManMolderMpersonMmightMhaveMaM
higherMorMlowerMtimeMpreferenceMthanMaMyoungMperson.
ANS:MAnMolderMpersonMmightMhaveMaMhighMtimeMpreference,MconsumerMnowMvs.MinMtheMfuture.MTheM
olderMpersonMwillMplaceMhigherMvalueMonMtheMabilityMtoMconsumeMnowMmoreMthanMmoneyMinMtheMfut
ure.
2. WhatMisMtheMfutureMvalueMofM$500MinMtwoMyearsMifMtheMinterestMrateMisM4%?MHowMwouldMyouMexplai
nMthisMtoMsomeoneMwhoMhasMnoMtrainingMinMeconomics?
ANS:M500(1.04)2M=M$540.80.MForMsomeoneMwithoutMaMbackgroundMinMeconomics,MoneMcouldMexplainMt
hatMmoneyMinvestedMtodayMwillMgrowMoverMtime.MThus,MinMorderMtoMhaveM$500MinMtheMfuture,MtodayM
youMwouldMonlyMneedMtoMinvestMsomeMamountMthatMisMlessMthanM$500.MHowMmuchMlessMdependsMonM
theMreturnMonMyourMinvestmentM(theMinterestMrate).
3. IfMtheMannualMinterestMrateMisM2%,MwhatMisMtheMquarterlyMinterestM
rate?Ma.M0.0204
b.M0.0166
c.M0.005
d.M0.001
ANS:M C
CHAPTERM3:MBondsMandMLoanableMFunds
3-1 SectionMReview
1. Today,MshoppersM“clipMcoupons”MbeforeMtheyMgoMshopping.MExplainMhowMtheseMmodernMcoupon
sMareMsimilarMandMdissimilarMtoMtheM“coupons”MreferredMtoMinMtheMbondMmarket.
ANS:MToday,Mthough,MmostMbondsMareMnotMphysicalMprintedMpiecesMofMpaperMwithMcouponsMthatMm
ustMbeMclippedMoffMandMmailedMtoMtheMissuer.
2. TheMfactMthatMtheMfaceMvalueMofMaMbondMdoesMnotMchangeMoverMtheMlifeMofMtheMbondMisMg
enerallyMconsideredMaMbenefitMtoMtheMborrower.MCanMyouMexplainMwhy?
ANS:MIfMtheMmarketMconditionsMchange,MsayMratesMdrop,MtheMfaceMvalueMwillMnotMchange.
3. TheMrateMofMinterestMaMbondMpaysMisMcalledMtheMbond’s:
a. faceMvalue.
b. couponMrate.
c. bondMrating.
d. ratingMrate.
, ANS:M B
3-2 SectionMReview
1. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.25%,MbutMtheMmarketM
interestMrateMforMsuchMbondsMisM2.5%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscount?M
ExplainMwhy.
ANS:MWhenMmarketMinterestMratesMriseMrelativeMtoMcouponMratesMonMexistingMbonds,MtheMpriceMofMthes
eMexistingMbondsMdecreaseMbelowMfaceMvalue.MThisMmeansMthatMthisMbondMwillMbeMsoldMatMaMdiscount,M
sinceMtheMmarketMpriceMisMbelowMtheMfaceMvalueMofMtheMbond.
2. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.5%,MbutMtheMmarket
MinterestMrateMforMsuchMbondsMisM2.25%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscou
nt?MExplainMwhy.
ANS:MPremiumMbecauseMtheMcouponMrateMisMlessMthanMtheMmarketMrate.
3. IfMaMthree-
yearMbondMwithMaM$1,000MfaceMvalueMhasMaMcouponMrateMofM3.5%,MandMtheMcurrentMmarketMinter
estMrateMisM2%,MwhatMisMtheMmarketMpriceMofMtheMbond?
a.M$956.75
b.M$1,035.00
c.M$1,043.30
d.M$1,148.3
4MANS:Mc
3-3 SectionMReview
1. YouMreadMinMtheMfinancialMpressMthatMmarketMparticipantsMexpectMstockMpricesMtoMincreaseMdramatic
allyMinMtheMnearMfuture,MwhileMatMtheMsameMtimeMbusinessMconfidenceMisMincreasing.MExplainMinMwordsM
andMshowMgraphicallyMwhatMwillMhappenMinMtheMbondMmarketMifMtheMfirstMchangeMisMlargerMinMmagnitu
deMthanMtheMsecond.
ANS:MStocksMandMbondsMareMconsideredMsubstitutes,MtheMreturnMonMholdingMstocksMareMgoingMtoMinc
rease,MyouMdoMnotMwantMtoMholdMbonds.M DemandMforMbondsMwillMfall,MrelativeMreturnMtoMbondsMisMd
eclining.
BusinessMconfidenceMisMincreasingMsoMfirmsMareMgoingMtoMfundMmoreMprojects.MTheyMwillMneedMtoMborr
owMmoreMmoney,MorMsellMmoreMbondsMtoMraiseMthoseMfunds.MTheMsupplyMofMbondsMisMincreasing.MDue
MtoMtheMdecreaseMinMdemandMforMbondsMisMbiggerMthanMtheMsecond,MweMcanMconcludeMequilibriumMpri
ceMwillMfallMandMequilibriumMquantityMwillMincrease.
2. StoriesMappearMinMtheMfinancialMpressMreportingMtwoMeconomicMdevelopments:MWealthMlevelsMinMt
heMUnitedMStatesMareMincreasing,MwhileMatMtheMsameMtimeMtheMrelativeMriskinessMofMbondsMissuedMby
MAmericanMcorporationsMisMdecreasing.MExplainMinMwordsMwhatMwillMhappenMinMtheMUSMbondMmarketM
becauseMofMtheseMtwoMevents.
ANS:MIncreasingMwealthMlevelsMcauseManMincreaseMinMtheMdemandMforMbondsMbecauseMhouseholdsMcan
MuseMthisMwealthMnotMonlyMtoMincreaseMconsumptionMbutMalsoMsave.MSomeMportionMofMtheseMnewMsavi
its
ngsMway
MwillMMinto
findMtheMbondMmarketMasMhouseholdsMwillMpurchaseMmoreMbondsMatMeveryMprice.MAtMtheMsam
eifMtime,
defaultMriskMdecreases,MsaversMwillMbuyMmoreMbondsMasMtheyMareMconsideredMaMrelativelyMsaferMasse
t.MSo,
M M
Money,MBanking,MFinancialMMarketsM&MInstitutionsM2ndMEditionMforMBrandlMMichael
ChapterM2-24
CHAPTERM2:MMoney,MMoneyMSupply,MandMInterest
2-1 SectionMReview
1. WhatMisMtheMdifferenceMbetweenMmoneyMandMcurrency?MWhenMareMtheyMtheMsame?MWhyMmightMt
heyMbeMdifferent?
ANS:MMoneyMisManythingMgenerallyMacceptedMinMexchangeMforMgoodsM&Mservices.MCurrencyMisMissued
MbyMaMbankMorMtheMgovernment,MbutMcurrencyMisMnotMnecessarilyMmoney.MTheyMareMtheMsameMwhen
MtheyMareMacceptedMinMexchangeMforMgoodsMandMservices.MCurrenciesMcanMstopMbeingMmoneyMifMpeo
pleMdon’tMacceptMthemMinMexchangeMforMgoodsMandMservices.MIfMaMgroupMofMpeopleMstopMusingMcurre
ncyMtoMgetMgoodsMandMservicesMbutMinsteadMuseMbananas,MthenMtheMbananasMareMtheMmoney.
2. HowMmanyMpricesMmustMaMbarterMeconomyMhaveMifMtheMeconomyMhasMfourMgoods?MWhatMifMitM
hasM400Mgoods?MExplainMwhyMhavingMaMmoneyMinMtheMsecondMcaseMisMbeneficial.
ANS:M4MgoodsM=M6Mprices;M400MgoodsM=M79,800Mprices.MMoneyMallowsMusMtoMspecializeMandMreduceMour
MsearchMcost.M MoneyMallowsMusMtoMreduceMtheMnumberMofMstatedMpricesMweMneed.
3. YouMreadMaMnewsMstoryMaboutMaMcountryMthatMisMsufferingMfromMrapid,MongoingMincreasesMinMthe
McostMofMliving.MWhichMcharacteristicMofMmoneyMisMbeingMdirectlyMnegativelyMimpactedMinMthatMecono
my?
a. UnitMofMaccount
b. MediumMofMexchange
c. StoreMofMvalue
d. DoubleMcoincidenceMofMwan
tsMANS:MC
2-2 SectionMReview
1. BobbyMisMconfused.MHeMstates:M“SinceMprisonersMareMnotMallowedMtoMsmokeMinMprisonsManyMlonger,
Radford’sMexamplesMofMcigarettesMinMPOWMcampsMnoMlongerMapplies.”MHowMwouldMyouMexplainMtoM
BobbyMhowMRadford’sMstoryMdemonstratesMtheMconceptsMofMtheMcriteriaMofMmoney,MasMwellMasMtheMi
mportanceMofMchangesMinMtheMmoneyMsupply?
ANS:MAnyMassetMthatMisMableMtoMbeMstandardized,Mdivisible,MdurableMandMinMdemandMcouldMbeMcurren
cy,MasMlongMasMitMisMaMmediumMofMexchange,MisMaMunitMofMaccountMandMhasMstoreMofMvalue.M Cigarette
sMwereMmoney.
,2. ProponentsMofMtheMGoldMStandard,MorMusingMgoldMasMmoney,MoftenMargueMthatMitMwillMkeepMinflation
MunderMcontrol.MHowMdoesMtheMexperienceMofMEuropeMinMtheMsixteenthMcenturyMraiseMdoubtsMaboutMth
atMclaim?
ANS:MIfMpeopleMstartMtoMhoardMgoldMorMsilver,MthereMmayMnotMbeMenoughMmoney,MandManMeconomy
McouldMslideMintoMrecession.M IfMgoldMorMsilverMincreasesMtooMrapidlyMtheMeconomyMcouldMsufferMinflat
ion.
3. RicardoMandMFriedmanMagreeMthatMifMtheMmoneyMsupplyMincreasesM“tooMquickly”MtheMfollowingMhappen
s:
a. TheMrateMofMinflationMdecreases.
b. TheMrateMofMrealMeconomicMgrowthMincreases.
c. TheMrateMofMinflationMincreases.
d. TheMlevelMofMemploymentMdecreases.
ANS:MC
2-3 SectionMReview
1. AMcriticMofMmoneyMeconomicsMonceMstated,M“ifMyouMcannotMmeasureMtheMmoneyMsupplyMaccuratel
y,MitMisMnotMworthMdiscussingMatMall.”MHowMwouldMyouMrefuteMthisMstatement?
ANS:MDueMtoMchangesMinMfinancialMmarkets,MfinancialMinnovationMandMchangesMinMtheMwayMbanksMop
erate,MledMtoMtheMdeclineMinMtheMusefulnessMofMM2MasMaMmonetaryMaggregate.
2. EconomistsMareMsearchingMforMaM“good”MmeasurementMofMtheMmoneyMsupply.MWhatMconstitutesMa
MgoodMmeasurementMofMtheMmoneyMsupply?
ANS:MToMeconomists,MaM“good”MmeasurementMofMtheMmoneyMsupplyMisMoneMthatMconformsMtoMecono
micMtheoriesMregardingMinflationMandMtheMeconomy.MForMexample,MifMtheMmoneyMsupplyM(accordingMto
MaMparticularMmeasurement)MincreasesMfasterMthanMtheMgrowthMrateMofMtheMeconomy,MthenMeconomic
MtheoryMsuggestsMthatMinflationMshouldMoccur.MOnMtheMotherMhand,MifMtheMmoneyMsupplyM(accordingMt
oMaMparticularMmeasurement)MincreasesMtooMslowlyMrelativeMtoMtheMgrowthMrateMofMtheMeconomy,Mthe
nMeconomicMtheoryMsuggestsMthatMthisMwillMresultMinMaMrecession.MWhenMtheMmeasurementMofMtheMmo
neyMsupplyMcoincidesMwithMtheseMeconomicMpredictions,MthenMthatMparticularMmeasurementMhasMtheMp
otentialMtoMbeMaM“good”MmeasurementMofMtheMmoneyMsupply.MDuringMcertainMperiodsMofMtime,MbothM
M1MandMM2MhaveMbeen
consideredMtoMbeM“good”MmeasurementsMofMtheMmoneyMsupply.MHowever,MthereMhaveMalsoMbeenMperi
odsMofMtimeMwhereMtheMchangesMinMM1MorMM2MdidMnotMcoincideMwithMeconomicMtheory.
3. WhichMofMtheMfollowingMisMtheMbroadestMorMmostMinclusiveMmeasurementMofMtheMmoneyMsupply?
a. M1
b. M2
c. M3
d. M0
ANS:M B
,2-4 SectionMReview
1. EachMpersonMmightMhaveMaMdifferentMtimeMpreference.MExplainMwhyManMolderMpersonMmightMhaveMaM
higherMorMlowerMtimeMpreferenceMthanMaMyoungMperson.
ANS:MAnMolderMpersonMmightMhaveMaMhighMtimeMpreference,MconsumerMnowMvs.MinMtheMfuture.MTheM
olderMpersonMwillMplaceMhigherMvalueMonMtheMabilityMtoMconsumeMnowMmoreMthanMmoneyMinMtheMfut
ure.
2. WhatMisMtheMfutureMvalueMofM$500MinMtwoMyearsMifMtheMinterestMrateMisM4%?MHowMwouldMyouMexplai
nMthisMtoMsomeoneMwhoMhasMnoMtrainingMinMeconomics?
ANS:M500(1.04)2M=M$540.80.MForMsomeoneMwithoutMaMbackgroundMinMeconomics,MoneMcouldMexplainMt
hatMmoneyMinvestedMtodayMwillMgrowMoverMtime.MThus,MinMorderMtoMhaveM$500MinMtheMfuture,MtodayM
youMwouldMonlyMneedMtoMinvestMsomeMamountMthatMisMlessMthanM$500.MHowMmuchMlessMdependsMonM
theMreturnMonMyourMinvestmentM(theMinterestMrate).
3. IfMtheMannualMinterestMrateMisM2%,MwhatMisMtheMquarterlyMinterestM
rate?Ma.M0.0204
b.M0.0166
c.M0.005
d.M0.001
ANS:M C
CHAPTERM3:MBondsMandMLoanableMFunds
3-1 SectionMReview
1. Today,MshoppersM“clipMcoupons”MbeforeMtheyMgoMshopping.MExplainMhowMtheseMmodernMcoupon
sMareMsimilarMandMdissimilarMtoMtheM“coupons”MreferredMtoMinMtheMbondMmarket.
ANS:MToday,Mthough,MmostMbondsMareMnotMphysicalMprintedMpiecesMofMpaperMwithMcouponsMthatMm
ustMbeMclippedMoffMandMmailedMtoMtheMissuer.
2. TheMfactMthatMtheMfaceMvalueMofMaMbondMdoesMnotMchangeMoverMtheMlifeMofMtheMbondMisMg
enerallyMconsideredMaMbenefitMtoMtheMborrower.MCanMyouMexplainMwhy?
ANS:MIfMtheMmarketMconditionsMchange,MsayMratesMdrop,MtheMfaceMvalueMwillMnotMchange.
3. TheMrateMofMinterestMaMbondMpaysMisMcalledMtheMbond’s:
a. faceMvalue.
b. couponMrate.
c. bondMrating.
d. ratingMrate.
, ANS:M B
3-2 SectionMReview
1. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.25%,MbutMtheMmarketM
interestMrateMforMsuchMbondsMisM2.5%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscount?M
ExplainMwhy.
ANS:MWhenMmarketMinterestMratesMriseMrelativeMtoMcouponMratesMonMexistingMbonds,MtheMpriceMofMthes
eMexistingMbondsMdecreaseMbelowMfaceMvalue.MThisMmeansMthatMthisMbondMwillMbeMsoldMatMaMdiscount,M
sinceMtheMmarketMpriceMisMbelowMtheMfaceMvalueMofMtheMbond.
2. IfMyouMhaveMaMbondMwithMaMfaceMvalueMofM$1,000MandMaMcouponMrateMofM2.5%,MbutMtheMmarket
MinterestMrateMforMsuchMbondsMisM2.25%,MwillMyourMbondMsellMatMpar,MatMaMpremium,MorMatMaMdiscou
nt?MExplainMwhy.
ANS:MPremiumMbecauseMtheMcouponMrateMisMlessMthanMtheMmarketMrate.
3. IfMaMthree-
yearMbondMwithMaM$1,000MfaceMvalueMhasMaMcouponMrateMofM3.5%,MandMtheMcurrentMmarketMinter
estMrateMisM2%,MwhatMisMtheMmarketMpriceMofMtheMbond?
a.M$956.75
b.M$1,035.00
c.M$1,043.30
d.M$1,148.3
4MANS:Mc
3-3 SectionMReview
1. YouMreadMinMtheMfinancialMpressMthatMmarketMparticipantsMexpectMstockMpricesMtoMincreaseMdramatic
allyMinMtheMnearMfuture,MwhileMatMtheMsameMtimeMbusinessMconfidenceMisMincreasing.MExplainMinMwordsM
andMshowMgraphicallyMwhatMwillMhappenMinMtheMbondMmarketMifMtheMfirstMchangeMisMlargerMinMmagnitu
deMthanMtheMsecond.
ANS:MStocksMandMbondsMareMconsideredMsubstitutes,MtheMreturnMonMholdingMstocksMareMgoingMtoMinc
rease,MyouMdoMnotMwantMtoMholdMbonds.M DemandMforMbondsMwillMfall,MrelativeMreturnMtoMbondsMisMd
eclining.
BusinessMconfidenceMisMincreasingMsoMfirmsMareMgoingMtoMfundMmoreMprojects.MTheyMwillMneedMtoMborr
owMmoreMmoney,MorMsellMmoreMbondsMtoMraiseMthoseMfunds.MTheMsupplyMofMbondsMisMincreasing.MDue
MtoMtheMdecreaseMinMdemandMforMbondsMisMbiggerMthanMtheMsecond,MweMcanMconcludeMequilibriumMpri
ceMwillMfallMandMequilibriumMquantityMwillMincrease.
2. StoriesMappearMinMtheMfinancialMpressMreportingMtwoMeconomicMdevelopments:MWealthMlevelsMinMt
heMUnitedMStatesMareMincreasing,MwhileMatMtheMsameMtimeMtheMrelativeMriskinessMofMbondsMissuedMby
MAmericanMcorporationsMisMdecreasing.MExplainMinMwordsMwhatMwillMhappenMinMtheMUSMbondMmarketM
becauseMofMtheseMtwoMevents.
ANS:MIncreasingMwealthMlevelsMcauseManMincreaseMinMtheMdemandMforMbondsMbecauseMhouseholdsMcan
MuseMthisMwealthMnotMonlyMtoMincreaseMconsumptionMbutMalsoMsave.MSomeMportionMofMtheseMnewMsavi
its
ngsMway
MwillMMinto
findMtheMbondMmarketMasMhouseholdsMwillMpurchaseMmoreMbondsMatMeveryMprice.MAtMtheMsam
eifMtime,
defaultMriskMdecreases,MsaversMwillMbuyMmoreMbondsMasMtheyMareMconsideredMaMrelativelyMsaferMasse
t.MSo,
