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 83 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


mcabuhat

  • Member
  • Posts: 344
Reply 3 on: Yesterday
:D TYSM

 

Did you know?

Walt Disney helped combat malaria by making an animated film in 1943 called The Winged Scourge. This short film starred the seven dwarfs and taught children that mosquitos transmit malaria, which is a very bad disease. It advocated the killing of mosquitos to stop the disease.

Did you know?

The first-known contraceptive was crocodile dung, used in Egypt in 2000 BC. Condoms were also reportedly used, made of animal bladders or intestines.

Did you know?

When intravenous medications are involved in adverse drug events, their harmful effects may occur more rapidly, and be more severe than errors with oral medications. This is due to the direct administration into the bloodstream.

Did you know?

According to the Migraine Research Foundation, migraines are the third most prevalent illness in the world. Women are most affected (18%), followed by children of both sexes (10%), and men (6%).

Did you know?

Increased intake of vitamin D has been shown to reduce fractures up to 25% in older people.

For a complete list of videos, visit our video library