1.   (a) More, because the bonds have become more liquid; (b) more, because their expected return has risen relative to stocks; (c) less, because they have become less liquid relative to stocks; (d) less, because their expected return has fallen; (e) more, because they have become more liquid.

2.   When the Fed sells bonds to the public, it increases the supply of bonds, thus shifting the supply curve B^s to the right. The result is that the intersection of the supply and demand curves B^s and B^d occurs at a lower price and a higher equilibrium interest rate, and the interest rate rises. With the liquidity preference framework, the decrease in the money supply shifts the money supply curve M^s to the left, and the equilibrium interest rate rises. The answer from bond supply and demand analysis is consistent with the answer from the liquidity preference framework.

3.   When the price level rises, the quantity of money in real terms falls (holding the nominal supply of money constant); to restore their holdings of money in real terms to their former level, people will want to hold a greater nominal quantity of money. Thus the money demand curve M^d shifts to the right, and the interest rate rises.

4.     Interest rates fall. The increased volatility of gold prices makes bonds relatively less risky relative to gold and causes the demand for bonds to increase. The demand curve, B^d, shifts to the right and the equilibrium interest rate falls.

5.     Interest rates would rise. A sudden increase in people’s expectations of future real estate prices raises the expected return on real estate relative to bonds, so the demand for bonds falls. The demand curve B^d shifts to the left, bond prices fall, and the equilibrium interest rate rises.

6.     Interest rates should rise. The large federal deficits require the Treasury to issue more bonds; thus the supply of bonds increases. The supply curve, B^s, shifts to the right and the equilibrium interest rate rises. Some economists believe that when the Treasury issues more bonds, the demand for bonds increases because the issue of bonds increases the public’s wealth. If this is the case, the demand curve, B^d, will also shift to the right, and it is no longer clear that the equilibrium interest rate will rise. Thus there is some potential ambiguity in the answer to this question.

7.     Given the answer to Question 10 above, the supply effect of large deficits should lead to higher interest rates. The effects of the economic crisis lead to significantly lower wealth and income, which depressed Treasury bond demand, but also decreased corporate bond supply by even more because investment opportunities collapsed. The larger leftward shift in the bond supply curve than the rightward shift in the bond demand curve would then result in a rise in bond prices and a fall in interest rates. In addition, due to the severity of the global crisis, U.S. treasury debt became a safe haven investment, reducing relative risk and increasing liquidity for U.S. treasury debt. This significantly raised U.S. treasury bond demand, leading to higher bond prices and significantly lower yields. In other words, the decrease in investment opportunities and risk factors significantly offset the wealth effect on demand and the deficit effect on supply.

8.     Yes, interest rates will rise. The lower commission on stocks makes them more liquid relative to bonds, and the demand for bonds will fall. The demand curve B^d will therefore shift to the left, and the equilibrium interest rate will rise.