16. The president of the United States announces in a press conference that he will fight the higher inflation rate with a new anti-inflation program. Predict what will happen to interest rates if the public believes him.
*17. The chairman of the Fed announces that interest rates will rise sharply next year, and the market believes him. What will happen to todays interest rate on AT&T bonds, such as the 85s of 2022?
18. Predict what will happen to interest rates if the public suddenly expects a large increase in stock prices.
*19. Predict what will happen to interest rates if prices in the bond market become more volatile.
20. If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current chair, what will happen to interest rates? Discuss the possible resulting situations.
1. One of the largest single influences on the level of interest rates is inflation. There are a number of sites that report inflation over time. Go to ftp://ftp.bls.gov /pub/special.requests/cpi/cpiai.txt and review the data available. Note that the last columns report various averages. Move this data into a spreadsheet using the method discussed in the Web exploration at the end of Chapter 1. What has the average rate of inflation been since 1950, 1960, 1970, 1980, and 1990? What year had the lowest level of inflation? What year had the highest level of inflation?
2. Increasing prices erodes the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to www.mterest.com/hugh/calc/cpi.cgi. What would a car that cost $22,000 today have cost the year that you were born?
3. One of the points made in this chapter is that inflation erodes investment returns. Go to www.src-net.com /InvestmentMultiplier/iminflation.htm and review how changes in inflation alter your real return. What happens to the difference between the adjusted value of an investment compared to its inflation-adjusted value as:
a. Inflation increases?
b. The investment horizon lengthens?
c. Expected returns increase?
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