Question

a) The Professor purchases a newly issued, two-year government bond with a principal amount of $4 000 and a coupon rate of 5% paid annually to pay for Berlin’s medical treatment. One year before the bond matures (and after receiving the coupon payment for the first year), The Professor sells the bond in the bond market. The price (rounded to the nearest dollar) the Professor will receive for his bond if the prevailing interest rate is 6% is:

A. Higher than $4000

B. Lower than $4000

C. $4200

D. Better pay the treatment right away before Berlin dies

b) In Tatooine, all ₹3 000 000 in currency is held by banks as reserves. The public does not hold any currency. If the banks' desired reserve–deposit ratio is 5%, the money supply in Tatooine equals (₹ is the symbol for the currency in Tatooine):

A. ₹2 850 000

B. ₹3 000 000

C. ₹3 150 000

D. ₹60 000 000

c) According to the quantity equation, if velocity is constant at 2 and real GDP is constant at 6000, then, if the money supply is increased from 4500 to 6000, the price level:

A. increases to 1.33

B. increases to 1.5

C. increases to 2

D. is constant at 1.5

Answer 1

The answers are as follows:-

1)B.Lower than 4000

Since the prevailing interest rate is 6 percent , the 5 percent coupon on the Professor's bond becomes inattractive to potential buyers and hence he will need to discount it in order to sell it.

2)A.2850000

150000 will be held by the bank in reserves while the rest will be lent out to the public hence beccoming the money supply for the same.

3)C.Increases to 2

M X V = P X Y

The above equation states that the quantity of money (M) times the velocity of money (V) equals the price of output (P) times the amount of output (Y). It is called the quantity equation because it relates the quantity of money (M) to the nominal Value of output (P X Y).Input the values into the equation to get the result.