The spread between the interest rates on Baa corporate bonds and U.S. government bonds is very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis
What will be an ideal response?
During the Great Depression many businesses failed. The default risk for the corporate bond increased compared to the default-free Treasury bond. The demand for corporate bonds decreased while the demand for Treasury bonds increased resulting in a larger risk premium.
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Explain the three different types of money demand
What will be an ideal response?
According to the interest rate effect, as the price level decreases, households and firms' holdings of money ____, interest rates ____, investments ____, and the quantity RGDP demanded ____
a. increases, decrease, increase, decreases b. increases, increase, increase, decreases c. decreases, decrease, increase, increases d. increases, increase, decrease, decreases
If, at the current price, there is a shortage of a good, then a. sellers are producing more than buyers wish to buy. b. the market must be in equilibrium
c. the price is below the equilibrium price. d. quantity demanded equals quantity supplied.
The federal funds rate is the interest rate:
a. The Federal Reserve changes banks that borrow from it. b. U.S. financial institutions charge their best customers. c. On U.S. interbank loans. d. Central banks charge individuals. e. U.S. financial institutions pay to their best (i.e., largest) depositors.