money and banking 16

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The entry of Covid-19 reduced demand for many goods and services and thereby earnings while also creating uncertainty about how a lot of firms will do in the future.

  • Explain (briefly, in a few sentences) how stock prices will be affected by a sudden crises with a fall in demand for goods and services and increased uncertainty about the future. (Think about the overall stock market and not particular stocks, like toilet paper, that may have a different reaction than the rest of the market)
  • Draw a graph for demand and supply of Treasury bonds. Label the axis and mark clearly the curves and the equilibrium price and quantity. Assume that the bond market starts out in January this year before the consequences of Covid-19 were known.
  • Then show in the same bond graph how the demand and/or supply curve(s) for Treasury bonds will shift as people realize there will be a lock-down and the economy will be negatively affected. Mark clearly the equilibrium before and after people knew about the economic consequences of Covid-19.
  • Explain why you shifted the bond market curve(s) the way you did.
  • Based on your answers to the questions above, would you have preferred being a holder of stocks or Treasury bonds coming into this crises? (That is: Would you have had a higher return by now if you came in to this crises holding stocks or Treasury bonds?) Explain briefly why.

Please refer to the question above and let me know if you have any questions. There is no specific materials required.

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