What three factors regarding differences in interest rates on similar bonds can prevent the interest parity condition from holding?
What will be an ideal response?
1. Investors typically see even similar bonds as having important differences in default risk and liquidity.
2. Typically, the cost of purchasing foreign financial assets (the transactions costs) are higher than for domestic assets.
3. The interest parity condition does not take into account the exchange-rate risk from investing in a foreign asset.
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Refer to Figure 12.4. Since the housing bubble burst and the economy returned to its initial, pre-bubble level before the corrective policy changed output, the impact of the change in policy is best represented as a movement from
A) point A to point B. B) point C to point D. C) point B to point D. D) point C to point B.
Reducing _____ the benefits available to the buyer and seller and might also enable them to make exchanges that were previously impossible
a. transaction costs decreases b. transaction costs increases c. marginal costs decreases d. marginal costs increases
In response to the sharp decline in stock prices in October 1987, the Federal Reserve
a. increased interest rates, and the economy avoided a recession. b. increased interest rates, but the economy was unable to avoid a recession. c. decreased interest rates, and the economy avoided a recession. d. decreased interest rates, but the economy was unable to avoid a recession.
In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have
a. increased both the money multiplier and the money supply. b. decreased both the money multiplier and the money supply. c. increased the money multiplier and decreased the money supply. d. decreased the money multiplier and increased the money supply.