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The demand and supply of a corporate bond (in units) is given by the following equations respectively. D=60k + 0.8 W - 60 + 2y
The demand and supply of a corporate bond (in units) is given by the following equations respectively. D=60k + 0.8 W - 60 + 2y + 5* S=600 - 40k +90 +8BD + 5y Where k= the nominal yield to maturity of the bond in percentage terms W = the aggregate wealth of investors in billions of dollars, ne = the expected rate of inflation in percentage terms y= national income, and BD = government budget deficit, and * = foreign rate of interest in percentage terms Suppose W = 2,000 billion, te= 2%, y = $500 billion, BD = $50 billion and * = 10% find equilibrium k and equilibrium quantity of the bond traded. e 1 Secondly, assume that keeping everything else constant, the expected rate of inflation rises to 3% from 2%. Recalculate the new equilibrium k and equilibrium quantity of the bond traded. Thirdly, calculate the real rate of interest under each of two levels of the expected rate of inflation. The demand and supply of a corporate bond (in units) is given by the following equations respectively. D=60k + 0.8 W - 60 + 2y + 5* S=600 - 40k +90 +8BD + 5y Where k= the nominal yield to maturity of the bond in percentage terms W = the aggregate wealth of investors in billions of dollars, ne = the expected rate of inflation in percentage terms y= national income, and BD = government budget deficit, and * = foreign rate of interest in percentage terms Suppose W = 2,000 billion, te= 2%, y = $500 billion, BD = $50 billion and * = 10% find equilibrium k and equilibrium quantity of the bond traded. e 1 Secondly, assume that keeping everything else constant, the expected rate of inflation rises to 3% from 2%. Recalculate the new equilibrium k and equilibrium quantity of the bond traded. Thirdly, calculate the real rate of interest under each of two levels of the expected rate of inflation
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