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Chapter 5: Q.12 (page 164)
Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.
If the stock brokerage commission reduces, the interest rate will fall.
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Using both the liquidity preference framework and the supply and demand for bonds framework, show why interest rates are procyclical (rising when the economy is expanding and falling during recessions)
Go to the St. Louis Federal Reserve FRED database, and find data on the Mmoney supply () and the -year U.S. Treasury bond rate (GS). For the Mmoney supply indicator, adjust the units setting to “Percent Change from Year Ago,” and for both variables, adjust the frequency setting to “Quarterly.” Download the data into a spreadsheet.
a. Create a scatter plot, with money growth on the horizontal axis and the -year Treasury rate on the vertical axis, from to the most recent quarter of data available. On the scatter plot, graph a fitted (regression) line of the data (there are several ways to do this; however, one particular chart layout has this option built in). Based on the fitted line, are the data consistent with the liquidity effect? Briefly explain.
b. Repeat part (a), but this time compare the contemporaneous money growth rate with the interest rate four quarters later. For example, create a scatter plot comparing money growth from with the interest rate from , and so on, up to the most recent pairwise data available. Compare your results to those obtained in part (a), and interpret the liquidity effect as it relates to the income, price-level, and expected-inflation effects.
c. Repeat part (a) again, except this time compare the contemporaneous money growth rate with the interest rate eight quarters later. For example, create a scatter plot comparing money growth from with the interest rate from , and so on, up to the most recent pairwise data available. Assuming the liquidity and other effects are fully incorporated into the bond market after two years, what do your results imply about the overall effect of money growth on interest rates?
d. Based on your answers to parts (a) through (c), how do the actual data on money growth and interest rates compare to the three scenarios presented in Figure of this chapter?
Explain why you would be more or less willing to buy gold under the following circumstances: a. Gold again becomes acceptable as a medium of exchange.
b. Prices in the gold market become more volatile.
c. You expect inflation to rise, and gold prices tend to move with the aggregate price level.
d. You expect interest rates to rise
Why should a rise in the price level (but not in expected inflation) cause interest rates to rise when the nominal money supply is fixed?
In the aftermath of the global economic crisis that started to take hold in , U.S. government budget deficits increased dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for quite some time. Does this make sense? Why or why not?
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