A one-year bond has an interest rate of 3% and is expected to fall to 2.5% next year and 2% in two years. The term premium for a two-year bond is 0.3% and for a three-year bond is 0.5%
What are the interest rates on a two-year bond and three-year bond according to the liquidity premium theory?
A two-year bond will have an interest rate of (3% + 2.5%)/2 + 0.3% = 3.05%. A three-year bond will have an interest rate of (3% + 2.5%+2%)/3 + 0.5% = 3%.
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Sometimes the government deals with externalities by creating laws to regulate behavior instead of using taxes to correct the market failure. So, requiring auto manufacturers to install a device called a catalytic converter which removes some toxins from exhaust may be preferable to a gas tax that reduces driving levels. This route is often preferred because:
a. c and e. b. it requires less technological development. c. it doesn't penalize drivers of clean cars. d. only car drivers pay for the externality. e. the cost of the externality is unknown.
Refer to the given data. The United States has a balance of goods:
The following table contains hypothetical data for the 2012 U.S. balance of payments. Answer the question on the basis of this information. All figures are in billions of dollars.
A. deficit of $10 billion.
B. surplus of $30 billion.
C. deficit of $30 billion.
D. surplus of $20 billion.