Use Figure 12

question 31

Essay

Use Figure 12.1 to answer the following question. Assume that this industry is currently enjoying normal economic profit and for whatever reason there is an increase in demand for the goods produced by this industry. Using general equilibrium analysis explain what will happen both in this industry and in industry Y which is perceived by consumers as being a product that is a substitute for product X.

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Definitions:

Liquidity Premiums

Additional yield that investors demand for holding securities that are not easily sold at their fair market value without a significant price concession.

Callable Bonds

Bonds that can be redeemed by the issuer prior to their maturity date at a predetermined call price.

Required Rate Of Return

The minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project.

Reinvestment Rate Risk

Reinvestment Rate Risk is the risk that the returns from reinvesting cash flows will be lower than initially anticipated due to changes in interest rates.