Utilizing the expectations hypothesis and the taylor rule

Reference no: EM1335331

Treasury Yields and Economic News Article

The article in question is "Treasury Prices Drift Lower As Stock Market Stages Rally" published in the Wall Street Journal on Monday, April 12th 2003.

I) The article above says, "Underlying the Treasury market's limited downside Monday is the broad-based concern that even with the war in Iraq having been completed, economic activity has still yet to pick up in any meaningful way." Using the expectations hypothesis and the Taylor rule provide an interpretation of this comment in the article.

ii) The last paragraph of the above article says, "But of far more importance will be Federal Reserve Chairman Alan Greenspan's testimony on the economy on Wednesday, along with the release Friday of the April employment situation report." Suppose the economic release on Friday (i.e., May 2nd) shows that the number of jobs (payroll) in the last month increased in the U.S. economy more than what is expected; how will this affect the price of the 30 year Treasury bond and equity prices? Provide an economic justification for your answer.

Reference no: EM1335331

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