Question: 1.Using both the supply and demand for bonds and the liquidity preference framework, show how interest rates are affected when the riskiness of bonds decreases.

1.Using both the supply and demand for bonds and the liquidity preference framework, show how interest rates are affected when the riskiness of bonds decreases. Are the results the same in the two frameworks?

2.The bank you manage has the following balance sheet:

framework, show how interest rates are affected when the riskiness of bonds

\fAssets Liabilities Reserves $15 million Deposits $100 million Loans $105 million Bank capital $20 million

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