Question

1.Suppose the liquidity of corporate bonds increases. What would be the major effect. Why? -Increase in...

1.Suppose the liquidity of corporate bonds increases. What would be the major effect. Why?

-Increase in demand for loanable funds (increase in supply of bonds)         

-Decrease in demand for loanable funds (decrease in supply of bonds)  

-Increase in supply of loanable funds (increase in demand for bonds)

-Decrease in supply of loanable funds (decrease in demand for bonds)

2. Suppose the government reduces taxes but holds government spending constant, thus increasing the government budget deficit. What would be the major effect in the market for loanable funds? Why?

Increase in demand for loanable funds (increased supply of bonds)

Decrease in demand for loanable funds (decreased supply of bonds)      

Increase in supply of loanable funds (increased demand for bonds)

Decrease in supply of federal funds (decreased demand for bonds)

3. Suppose the Federal Reserve buys Treasury Bills in the secondary market.What would be the major effect in the market for federal funds? Why?

-Increase in demand for federal funds     

-Decrease in demand for federal funds

-Increase in supply of federal funds

-Decrease in supply of federal funds

         

           

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Answer #1

1 If liquidity of corporate bonds increases, then it would lead to Increase in supply of loanable funds (increase in demand for bonds). Because investors can now more easily buy and sell the bond, demand for bonds will increase.

2 If the government reduces taxes but holds government spending constant, thus increasing the government budget deficit it would lead to Increase in demand for loanable funds (increased supply of bonds). Since Government have more deficit now which it need to borrow. Thus increase in supply of bonds.

3. If Federal Reserve buys Treasury Bills in the secondary market, it would lead to Increase in demand for federal funds. Since supply of Treasury Bills is constant and now Federal Reserve buys Treasury Bills thus increasing the same for TBills.

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