Author Question: Suppose individuals expect an increase in future taxes. Explain what effect this expected increase ... (Read 98 times)

a0266361136 · **on:** Jun 30, 2018

Suppose individuals expect an increase in future taxes. Explain what effect this expected increase 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

An increase in the money supply will cause an increase in which of the following variables?

A) output
B) investment
C) consumption
D) all of the above
E) none of the above

stillxalice · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The increase in future taxes will cause the future one-year rate to fall. This reduction in the expected one-year rate will cause the two-year rate to fall by approximately half the change in the future expected rate. The current one-year rate does not change. So, the yield curve pivots; it gets flatter (as the long-term rate falls). 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 drop in future i will increase stock prices while the drop in future Y will depress stock prices.

Answer to Question 2

D