Use the security market line model to explain why stock prices did not rise when the Federal Reserve lowered the risk-free interest rate during the Great Recession of 2007–2009.
What will be an ideal response?
During the Great Recession investors became more fearful about taking on risk, so they demanded more compensation (higher average expected return) for any level of risk (beta) along the security market line. In terms of the SML graph, the slope of the security market line increased. At the same time, the vertical intercept (risk-free interest rate) for the security market line decreased. The greater fear led to the selling of assets, including stocks. The slope of the line increased because investors demanded higher average returns at any risk level. This increase in slope more than offset the decline in the risk-free interest rate. Stock sold off as the risk-free interest rate fell.
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In contrast to other antipoverty programs, a negative income tax
a. provides incentives to work b. provides more assistance to children c. assists the unemployed d. provides direct in-kind transfers to the most needed e. recognizes the existence of a culture of poverty
Recessions occur at irregular intervals and are almost impossible to predict with much accuracy
a. True b. False Indicate whether the statement is true or false
The assumption of a fixed number of firms is appropriate for analysis of
a. the short run but not the long run. b. the long run but not the short run. c. both the short run and the long run. d. neither the short run nor the long run.
Why might the consequences of imposing a tax on harmful fast foods not adhere to theory?
What will be an ideal response?