Econ Unit 2 Linkages and Graphs Test

Question 1

If bond prices go down, what happens to bond interest rates (bond yields)?

Answer 1

Since bond prices went down, bond interest rates rise (bond yields rise) because there is an inverse relationship.

Question 2

If bond yields go down, what happens to bond prices?

Answer 2

Bond prices go up due to the inverse relationship.

Question 3

If demand is down for bonds, what happens to bond interest rates?

Answer 3

Go up

Question 4

What is the single biggest determinant of whether a business will invest or not?

Answer 4

the interest rate

Question 5

If interest rates fall what happens to business investment, stock of capital goods, economic growth (or PPC, or long run aggregate supply, or long run economic growth)?

Answer 5

down i–> up I–> up stock of capital goods–> up economic growth–> PPC shifts outward–> LRAS shifts to the right–> up long run economic growth

Question 6

The government runs a budget deficit. What happens to interest rates? Also, what happens to business investment? And, what is the crowding out effect?

Answer 6

They have to borrow money in the money market. This increases demand for money in the money market that drives up nominal interest rates. The tighter interest rate crowds out private investment and decreases business investment.