Reference no: EM132890193
Determination Of Interest Rates
Interest Elasticity. Explain what is meant by interest elasticity. Would you expect federal government demand for loanable funds to be more or less interest-elastic than household demand for loanable funds? Why?
Impact of Government Spending. If the federal government planned to expand the space program, how might this affect interest rates?
Impact of a Recession. Explain why interest rates tend to decrease during recessionary periods. Review historical interest rates to determine how they react to recessionary periods. Explain this reaction.
Impact of the Economy. Obtain or develop forecasts of economic growth and inflation. Use this information to forecast interest rates one year from now.
Impact of the Money Supply. Should increasing money supply growth place upward or downward pressure on interest rates?
Impact of Exchange Rates on Interest Rates. Assume that if the U.S. dollar strengthens, it can place downward pressure on U.S. inflation. Based on this information, how might expectations of a strong dollar affect the demand for loanable funds in the United States and U.S. interest rates? Is there any reason to think that expectations of a strong dollar could also affect the supply of loanable funds? Explain.
Nominal versus Real Interest Rate. What is the difference between the nominal interest rate and real interest rate? What is the logic behind the Fisher effect's implied positive relationship between expected inflation and nominal interest rates?
Forecasting Interest Rates. Why do forecasts of interest rates differ among experts?
Impact of Stock Market Crises. During periods in which investors suddenly become fearful that stocks are overvalued, they dump their stocks, and the stock market experiences a major decline. During these periods, interest rates tend to decline. Use the loanable funds framework discussed in this chapter to explain how the massive selling of stocks leads to lower interest rates.
Impact of Expected Inflation. How might expectations of higher global oil prices affect the demand for loanable funds, the supply of loanable funds, and interest rates in the United States? Will this affect the interest rates of other countries in the same way? Explain.
Global Interaction of Interest Rates. Why might you expect interest rate movements of various industrialized countries to be more highly correlated in recent years than in earlier years?
Impact of War. A war tends to cause significant reactions in financial markets. Why would a war in Iraq place upward pressure on U.S. interest rates? Why might some investors expect a war like this to place downward pressure on U.S. interest rates?
Impact of September 11. Offer an argument for why the terrorist attack on the United States on September 11, 2001 could have placed downward pressure on U.S. interest rates. Offer an argument for why the terrorist attack could have placed upward pressure on U.S. interest rates.