Question

True or False

part 1 Income Effect shows that a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right

part2 If both bond demand and supply shift right, then the net effect on the equilibrium bond price is ambiguous.

part 3 If the price of the bond at time t is $120 and at time t+1 is $132. Furthermore, if the coupon payment is $6, then the rate of capital gain is 15%.

Answer 1

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Solution part 1,

True,

increase in money demand will positively effect on income and effect of interest rate negative effect on income. if income increases Money demand curve shifts to rightward.

Solution part 2,

True,

increase in Money demand and an increase in the money supply will shift the curve to rightward.

An increase in money demand will increase the interest rate and an increase in the money supply will decrease the interest rate. the decrease in the interest rate decreases the bond price and an increase in the interest rate increase the bond price.

hence, we cant say about the net effect of equilibrium price we don't know about the increase\decrease in price so the net effect is ambiguous

Solution Part 3,

True,

when the bond price increase from 120 to 132. change in the capital gain is $12 and there is a coupon payment of $6.

the total change will become $18 capital gain.

the Percentage gain = (18/120)*100 = 0.15*100 = 15%