Economics of Government Bonds if Thesis

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12-3) the following reflects the amount and rate of return on the investment based the following formula:

Return = (500-P)/P

Price

Int Payment

Int Rate

As the price rises, the return on the bond diminishes. The bond that is priced today at $500 returns nothing to the holder for their time, but the bond that returns $125 over the year has a high rate of return.

12-5) This is not correct. When aggregate demand for money increases the interest rate, there will be a reduction in money demand, but the relationship between the two is not perfect. The decline in demand for money will not be sufficient to bring the interest rate back to equilibrium without assistance.

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The Fed must actively move to decrease the money supply in order to bring the interest rate back to equilibrium. The speaker is assuming that the demand for money is related only to interest rates, which is not the case. If that were the case the economy would always be in equilibrium, which is essentially the state described. The upward shift in demand would not occur at all. However, the upward shift in demand shows that there are other considerations at work in the economy, and thus the interest rate cannot be expected to respond to….....

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