Integrative Problem 3

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Integrative Problem 3

1. If interest rates are expected to increase, the sale of bonds and its proceeds can be used in buying short-term securities as the market value will not be greatly affected by interest rate fluctuations. If interest rates are expected to decline, bonds can be extended to capitalize on expectations.
2. As Japan withdraws their U.S. investment and moves into increased Japanese investments, inflation may occur, as the money supply will decrease in the U.S. market.
Market liquidity will be affected which will hinder economic growth

3. The flow of funds between US and Japan will be affected causing a minimal transfer of funds causing the dollar price to decrease. The exchange rate will decrease in the motive to encourage Japanese investment in the U.S.

4. Liquidity in the money market will decrease as Japan reduces their U.S. investment. Bond prices and the yield to maturity will be affected as well. The yield to maturity on bonds will decrease which will decrease the prices of the bonds.

5. The prices of risky securities will be affected more compared to less risky securities, as the prices of the securities are highly dependent on the beta and market conditions.

7. I recommend low risk money market securities as well as low risk bonds. Japanese investors will stop investing in treasury bills causing inflation and a decrease in the money supply, which will affect the securities as well as the bond market.
8. I would recommend the bulk of investing go to moderate risk investments, focusing on foreign and domestic equity. The remaining amount would be invested in bonds and short term investments.

9. A rightward shift in the demand curve would cause the equilibrium to shift towards the right. This would indicate that more loanable funds would be disbursed, but at a higher price. With increased demand, long-term interest…...

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