Suppose the U.S economy is undergoing a severe recession. This means that credit become crunched, investors...

Suppose the U.S economy is undergoing a severe recession. This means that credit become crunched, investors become more risk-averse, corporate liquidity deteriorates, banks are not willing to lend, etc. If this is true, credit spread of any given bond should become narrowed (instead of becoming widened). True or false. Explain.

Solutions

Expert Solution

Credit spread is the gap between returns of two alternative investments having different credit Qualities(Risk), usually having the same maturity.

Generally
1. Credit spread is narrow during normal/good times (that is when investors sentiment are good).

Because investors are ready to take the risk during good market sentiment for a less increase in return.
Hence narrowing the credit spread.

2. Credit spread is widened during recessions (that is when investors sentiment are bad to worst).

Whereas during recessions the investors become very much risk-averse hence they would want a much higher return for a little increase in risk.
This results in credit spread becoming widened.

Answer: False.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

In 2009, the U.S. economy was in a severe recession. The Federal Reserve had lowered the...

In 2009, the U.S. economy was in a severe recession. The Federal Reserve had lowered the federal funds rate to about 0 percent, but still wanted to stimulate the economy more. The inflation rate in 2009 was about –1%, but households’ and businesses’ inflation expectations for the upcoming year were higher and positive, about 1.5%. a) First, do households’ and businesses’ investment demand depend on the ex ante or ex post real interest rate? Briefly explain why. b) Draw an...

Suppose the U.S. economy goes into a recession; if it does we can expect the demand...

Suppose the U.S. economy goes into a recession; if it does we can expect the demand for bonds shifts to the ________, the supply of bonds shifts to the _________, and the interest rate _______. Group of answer choices Right; right; rises Left; right; rises Left; left; falls Right; left; falls

From the Portfolio Choice Theory: Consider an economy that is undergoing a recession. Using and drawing...

From the Portfolio Choice Theory: Consider an economy that is undergoing a recession. Using and drawing the demand and supply of bonds, show and explain what happens.

Assume that a hypothetical economy with an MPC of 0.9 is experiencing severe recession. Instructions: In...

Assume that a hypothetical economy with an MPC of 0.9 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion? $ billion. How large a tax cut would be needed to achieve the same increase in aggregate demand? $ billion. b. Determine one...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. By how...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt (i.e., maintaining the budget balance at its...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter your answers as positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $30 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? b. Determine one possible...

1. Suppose the U.S. economy moves out of a recession and incomes rise. What will happen...

1. Suppose the U.S. economy moves out of a recession and incomes rise. What will happen to the equilibrium prices and quantities of normal goods? If price stays the same would that be equilibrium? Why or why not? What will eventually happen in the market? What happens to equilibrium price and quantity? Which quantity is affected and how do you know? Would your answer be the same if you were discussing inferior goods? Explain using supply/demand graphs. 2. Draw a...

From the Portfolio Choice Theory: Consider an economy which is undergoing a recession. Using and drawing...

From the Portfolio Choice Theory: Consider an economy which is undergoing a recession. Using and drawing the demand and supply of bonds, show and explain what happens.

Suppose the Macroeconomy is in a state of severe recession as a result of significant declines...

Suppose the Macroeconomy is in a state of severe recession as a result of significant declines in aggregate demand. When you were asked to advise the Chairperson of the Federal Reserve about possible policy choices to deal with the this problem, you decided to recommend the use of monetary policy. To convince the Chairperson and the members of the FOMC that monetary policy works, will you recommend either an expansionary or a contractionary monetary policy?Explain your analysis and its results...

The U.S. economy entered the recession phase of the business cycle in December 2007. The recession...

The U.S. economy entered the recession phase of the business cycle in December 2007. The recession lasted until June 2009. discussing some of the things the central bank (Federal Reserve) and Congress did to help the economy during the Great Recession.

Subjects