Question

Read the financial news and answer following questions:
(Bloomberg Oct. 3, 2019) -- U.S. stocks advanced as investors ramped up bets that the Federal
Reserve will cut rates this month to shore up an economy showing increasing signs of weakness.
Treasuries rallied.
The S&P 500 headed for its first gain in three days after roaring back from a drop of more than 1%
sparked by the weakest reading on the services sector in three years. Odds the Fed cuts at its next
meeting spiked as the data came just after the worst factory numbers in a decade. Investors are also

finding their footing after the benchmark fell around 3% over the last two sessions, with one of the
hardest hit sectors, tech, pacing gains.
The yield on 10-year Treasuries dropped for the sixth straight day, while the dollar fell for a third
time in a row.
This downturn is starting to spread and that means the tea leaf readers at the Fed are going to be
teeing up a third rate cut this year when they next meet again at the end of this month, said Chris
Rupkey, chief financial economist at MUFG Union Bank. Policymakers are going to need a bigger
gun to stop this avalanche of bad news from dragging down business and consumer confidence
even further. Rate cuts are coming. Lots of them. Bet on it.
This week’s march of weak data confirmed investor concerns that the global economy is struggling
for traction, and may be seeping from the manufacturing sector into consumer sentiment, as the
U.S.-China trade war churns in the background. That’s also driving bets that the Fed will pump
more stimulus into the economy this year. Focus now turns to the nonfarm payrolls figure on
Friday, when Federal Reserve Chairman Jerome Powell will also speak.
a) Why” stocks advanced”? Relate your explanation to the theory of asset demand.
Draw a graph to illustrate your answer.
b) Why “Treasuries rallied”? Relate your explanation to the theory of asset demand.
Draw a graph to illustrate your answer.
c) Why the yield on Treasuries “dropped”?

Answer 1