2.a) The following table was adapted from the 2007 Economic Report of the Presid
ID: 1157106 • Letter: 2
Question
2.a) The following table was adapted from the 2007 Economic Report of the President. Please use data from the table to answer the following questions.
Year
Interest
Rate on
10-year Treasury
Securities
Interest
Rate on
Corp.
Aaa
Bonds
Year
Interest
Rate on
10-year Treasury
Securities
Interest Rate on Corp.
Aaa
Bonds
1982
13.00
13.79
1995
6.57
7.59
1983
11.10
12.04
1996
6.44
7.37
1984
12.44
12.71
1997
6.35
7.26
1985
10.62
11.37
1998
5.26
6.53
1986
7.68
9.02
1999
5.65
7.04
1987
8.39
9.38
2000
6.03
7.62
1988
8.85
9.71
2001
5.02
7.08
1989
8.49
9.26
2002
4.61
6.49
1990
8.55
9.32
2003
4.01
5.67
1991
7.86
8.77
2004
4.27
5.63
1992
7.01
8.14
2005
4.29
5.24
1993
5.87
7.22
2006
4.80
5.59
1994
7.09
7.96
Source: 2007 Economic Report of the President, Table B-73.
a) When interest rates rise on U.S. Treasury securities, what happens to rates on corporate bonds? What pays a higher rate of interest, corporate bonds or government bonds?
b) If corporate bonds and U.S. Treasury securities paid the same rate of interest, which one would be the best choice from the viewpoint of a rational, self-interested investor? Why?
c) How does the level of interest rates affect your workplace?
Year
Interest
Rate on
10-year Treasury
Securities
Interest
Rate on
Corp.
Aaa
Bonds
Year
Interest
Rate on
10-year Treasury
Securities
Interest Rate on Corp.
Aaa
Bonds
1982
13.00
13.79
1995
6.57
7.59
1983
11.10
12.04
1996
6.44
7.37
1984
12.44
12.71
1997
6.35
7.26
1985
10.62
11.37
1998
5.26
6.53
1986
7.68
9.02
1999
5.65
7.04
1987
8.39
9.38
2000
6.03
7.62
1988
8.85
9.71
2001
5.02
7.08
1989
8.49
9.26
2002
4.61
6.49
1990
8.55
9.32
2003
4.01
5.67
1991
7.86
8.77
2004
4.27
5.63
1992
7.01
8.14
2005
4.29
5.24
1993
5.87
7.22
2006
4.80
5.59
1994
7.09
7.96
Source: 2007 Economic Report of the President, Table B-73.
Explanation / Answer
c) Economic growth comes from Capital accumulation and technological advancement. Hence Option D is correct option
d) Resource use is allocatively efficient when the marginal benefit is equals the marginal cost of producing one extra unit. Hence Option A is correct Option.
Explanation: Allocative efficiency is the production of those goods and services that are most desired by society in the quantity that they desire. Because of economies of scale, the cost of producing an additional unit, known as the marginal cost, continually declines until it reaches a minimum. On the other hand, themarginal benefit, which is the benefit to society of the last unit, also declines with increasing quantity. Since the amount that consumers are willing to pay for a particular product depends on the marginal benefit of the last unit produced, a producer can maximize profit by producing more units until the marginal cost of producing the last unit is equal to the marginal benefit of that unit to society.
e) The usual PPF is bowed outward because not all resources are equally productive in all activities. Hence Option C is Correct
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