Answer the following questions:
a. What is a bond?
b. If bonds make fixed payments every year, explain how a reduction in market interest rates will increase the price of the bond in the market.
a. A bond is an IOU that allows firms or governments to borrow money. Most bonds either make interest payments every year and return the principal at the maturity date, or they pay both principal and interest in one lump sum at maturity.
b. Bonds typically make fixed interest payments that represent the interest rate as a percentage of the face value. If market interest rates fall, new bonds will offer lower interest than bonds already in the market. This will cause demand for bonds already in the market to rise, thus, raising their price.
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New Keynesian economists believe that nominal wages and prices respond ________ to shocks, and classical economists believe that nominal wages and prices respond ________ to shocks
A) quickly; quickly B) quickly; slowly C) slowly; quickly D) slowly; slowly
Which of the following statements about a firm, which is a price taker is false?
(a) The firm will sell its product at the market price. (b) The demand for firm's product will increase, if price is increased above the market price. (c) The demand for firm's product will decrease, if price is increased above the market price. (d) None of the above.
The invisible hand principle indicates that competitive markets can help promote the efficient use of resources
What will be an ideal response?
Developing countries do:
A. compete with one another for foreign investment, and this competition reduces the benefits from foreign investment. B. not compete with one another for foreign investment, because they have sufficient domestic saving to finance their investment needs. C. not compete with one another for foreign investment, because they lack the infrastructure to attract it in the first place. D. compete with one another for foreign investment, but this competition is beneficial to developing countries because it insures a more efficient allocation of resources.