Answer to Question #236300 in Macroeconomics for Charlie

Question

At the end of September, a barrel of light crude oil sold for almost $70 compared to a price near $30 a barrel in January 9f 2004. To answer the following questions,assume bind traders expect inflation to rise from 3% in 2005 to 5% in both 2006 and 2007. Also traders expect the American economy to enter a recession in 2007. Assume the prior to the recent run up oil prices, bond traders had expected inflation to remain stable in 2006 and 2007 at 3%.

Using a model of supply and demand,for one year T-Bills ,illustrate and explain the impact of an increase in expected inflation. Explain what your results imply for changes in the yield on 1 year T-Bills in 2006 and 2007.

Answer 1

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