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Old 05-19-2004, 10:39 PM   #4
Bungleau
40th Level Warrior
 

Join Date: October 29, 2001
Location: Western Wilds of Michigan
Posts: 11,752
Gods... economics was ages ago, and I tried to put it out of my brain every time... it hasn't helped [img]smile.gif[/img]

Okay, let's see what I can dig out of the grey-cell repository...

Quote:
Originally posted by Lady Blue03:
It is imperative that I understand these two questions, because they are questions on the final that I am doing right at this moment-

First:
5. Suppose you have $20,000 to invest in a bond; you then hear a rumor that that the fed is about to lower the discount rate dramatically. Would you rather invest now or wait until it goes down? Explain fully.

Now I know you're supposed to wait to deposit until they drop, but I can't remember why [img]tongue.gif[/img]

Bond rates and something else march in opposite directions... I think the something else is interest rates. So if interest rates (the discount rate) go down, then bondholders will have to pay more to get people to loan them money (which is what a bond is). So by waiting for the discount rate to go down, the rate of return on your bond should go up, and you make more money.

It may be related to net present value and other similar things... if it's a $1000 bond paying 12%, then when the discount rate drops, it may be that you can buy it more cheaply. Unfortunately, I don't remember more of the details, but I do specifically remember the "marching in opposite lockstep" thing. That's probably at the heart of this question.



7. Under what circumstances can a budget deficit, not immediately financed by printing new money, still be inflationary? Explain fully.

This isn't M1/M2/M3 money again, is it? I just read somewhere that that was either discredited or thrown out as a 1980s way of thinking...

If not, let's think about what happens. The government runs at a deficit -- say, one billion dollars. It's going to pay that money though, so it has to come from somewhere. What the government does is to borrow money from the treasury department in the form of US T-bonds and T-bills. That money's not free, though; there's interest on it. The more interest being paid, the less money available for other things, and the greater the demand for money. That leads to people who loan money being able to charge more interest, which kicks off the inflation thing.



And thats the other-which im drawing a blank on. I need these answers, or at least understand where the questions coming from. There are only 12 ?s on the exam after all [img]tongue.gif[/img]

I've noticed about 0% of the people here are economically savvy, so I hope I'm not wasting my time [img]tongue.gif[/img]

HUGE thanks to anyone who can help
Am I economically savvy? Idunno... perhaps I've just fallen into that 0%. Hopefully I won't cause you to fail [img]smile.gif[/img] Good luck.
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