This topic contains a solution. Click here to go to the answer

Author Question: Suppose individuals expect a cut in future taxes. Explain what effect this expected reduction in ... (Read 84 times)

evelyn o bentley

  • Hero Member
  • *****
  • Posts: 564
Suppose individuals expect a cut in future taxes. Explain what effect this expected reduction in future taxes will have on the yield curve and on stock prices in the current period.
 
  What will be an ideal response?

Question 2

Assume that investment does not depend on the interest rate. A reduction in government spending will cause which of the following for this economy?
 
  A) no change in the interest rate
  B) no change in output
  C) no change in investment
  D) an increase in investment
  E) none of the above



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

otokexnaru

  • Sr. Member
  • ****
  • Posts: 314
Answer to Question 1

The reduction in future taxes will cause the future one-year rate to rise. This increase in the expected one-year rate will cause the two-year rate to rise by approximately half the change in the future expected rate. The current one-year rate does not change. So, the yield curve gets steeper (as the long-term rate rises). The effects on stock prices again depend on whether it is anticipated or not. If anticipated, stock prices do not change. If partially unexpected, the effect on stock prices is ambiguous: the rise in future i will decrease stock prices while the increase in future Y will increase stock prices.

Answer to Question 2

E




evelyn o bentley

  • Member
  • Posts: 564
Reply 2 on: Jun 30, 2018
Wow, this really help


amcvicar

  • Member
  • Posts: 341
Reply 3 on: Yesterday
Thanks for the timely response, appreciate it

 

Did you know?

Sperm cells are so tiny that 400 to 500 million (400,000,000–500,000,000) of them fit onto 1 tsp.

Did you know?

Chronic marijuana use can damage the white blood cells and reduce the immune system's ability to respond to disease by as much as 40%. Without a strong immune system, the body is vulnerable to all kinds of degenerative and infectious diseases.

Did you know?

After 5 years of being diagnosed with rheumatoid arthritis, one every three patients will no longer be able to work.

Did you know?

There are more nerve cells in one human brain than there are stars in the Milky Way.

Did you know?

Though the United States has largely rejected the metric system, it is used for currency, as in 100 pennies = 1 dollar. Previously, the British currency system was used, with measurements such as 12 pence to the shilling, and 20 shillings to the pound.

For a complete list of videos, visit our video library