Author Question: Explain why a comparison between the interest rates on domestic and foreign bonds might provide ... (Read 116 times)

Cooldude101 · **on:** Jun 30, 2018

Explain why a comparison between the interest rates on domestic and foreign bonds might provide misleading information about which bonds yield the highest expected returns.

What will be an ideal response?

Question 2

For this question, assume that the Phillips curve equation is represented by the following equation: t - t-1 = (m + z) - ut. A reduction in the unemployment rate will cause

A) a reduction in the markup over labor costs (i.e., a reduction in m).
B) an increase in the markup over labor costs.
C) an increase in the inflation rate over time.
D) a decrease in the inflation rate over time.
E) none of the above

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

Answer to Question 1

A simple comparison of interest rates will ignore the expected exchange gains/losses that can occur from holding assets denominated in a foreign currency. Hence, such a comparison will likely provide incorrect information about which bonds have a higher expected return.

Answer to Question 2

D