Economics Homework Help. ECON 500 University of California Berkeley Money and Banking Worksheet 4
Note: Part 1 is worth 15 points – it is on MyEconLab.
1. [3 points] What is the impact on interest rates today if investors expect the Federal Government
to run large budget deficits starting next year? Use the bond market diagram to illustrate the
impact on current interest rates. Then discuss the impact providing intuition. Provide a detailed
discussion as done in lecture.
2. [1.5 points] Draw an inverted yield curve. What is the association between short term and longterm interest rates when the yield curve is inverted? Briefly discuss. [this question
3. [1.5 points] If the yield curve is flat, what does the Liquidity premium theory predict about future
short-term interest rates? Briefly discuss.
4. [4 points] Suppose that it =6% (n=1), and that future short term interest rates (n=1) for the next 3
years (starting next year) are expected to be: 4%, 2%, 2%. The liquidity premium ln,t for n=2, 3,
and 4 is 0.25%, 0.35% and 0.5% respectively. Calculate in,t for n=2, 3, and 4. SHOW ALL
WORK. Plot the yield curve (just hand draw it).
5. [5 points] Use Excel (or some other software) to plot the yield curves for March 1st, April 1st,
May 3rd, June 1st, and July 1st; all dates refer to 2021. All data is available at: Daily Treasury
Yield Curve Rates. Then answer the following questions:
a. What do you observe regarding the change in the yield curve over the last few months?
Discuss briefly.
b. Consider the yield curve for July 1st. What does the Liquidity premium theory predict
about future short-term interest rates? Discuss (elaborate on your answer).
