** CH. 4 **

A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise

C

A rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________ A) decrease; right. B) decrease; left. C) increase; right. D) increase; left.

C

Determining asset prices using stocks of assets rather than flow is called A) asset transformation. B) expected return. C) asset market approach. D) market equilibrium.

C

Diversification benefits an investor by A) increasing wealth. B) increasing expected return. C) reducing risk. D) increasing liquidity.

C

During a recession, the supply of bonds ________ and the supply curve shifts to the ________. A) increases, left B) increases, right C) decreases, left D) decreases, right

C

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left

C

Factors that cause the demand curve for bonds to shift to the left include A) a decrease in the inflation rate. B) an increase in the volatility of stock prices. C) an increase in the liquidity of stocks. D) all of the above. E) only A and B of the above.

C

Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________. A) increase; left B) increase; right C) decrease; left D) decrease; right

C

When the price of a bond is ________ the equilibrium price, there is an excess supply of bonds and the price will ________. A) above; rise B) above; fall C) below; fall D) below; rise

B

________ is the total resources owned by an individual, including all assets. A) Expected return B) Wealth C) Liquidity D) Risk

B

Factors that determine the demand for an asset include changes in the A) wealth of investors. B) liquidity of bonds relative to alternative assets. C) expected returns on bonds relative to alternative assets. D) risk of bonds relative to alternative assets. E) all of the above.

E

True/False A movement along the demand (or supply) curve occurs when the quantity demanded (or supplied) changes at each given price (or interest rate) of the bond in response to a change in some other factor besides the bond's price or interest rate.

FALSE

True/False An increase in the inflation rate will cause the demand curve for bonds to shift to the right.

FALSE

True/False Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset.

FALSE

True/False The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on bonds.

FALSE

True/False When interest rates decrease, the demand curve for bonds shifts to the left.

FALSE

True/False When the federal government's budget deficit decreases, the demand curve for bonds shifts to the right.

FALSE

1) As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises. A) falls; rises B) falls; falls C) rises; rises D) rises; falls

A

A lower level of income causes the demand for money to ________ and the interest rate to ________ A) decrease; decrease. B) decrease; increase. C) increase; decrease. D) increase; increase.

A

Factors that can cause the supply curve for bonds to shift to the right include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) a decrease in government deficits. D) all of the above. E) only A and B of the above.

A

Holding everything else constant, an increase in the money supply causes A) interest rates to decline initially. B) interest rates to increase initially. C) bond prices to decline initially. D) both A and C of the above. E) both B and C of the above.

A

In his liquidity preference framework, Keynes assumed that money has a zero rate of return; thus, when interest rates ________ the expected return on money falls relative to the expected return on bonds, causing the demand for money to ________. A) rise; fall B) rise; rise C) fall; fall D) fall; rise

A

The demand for an asset rises if ________ falls. A) risk relative to other assets B) expected return relative to other assets C) liquidity relative to other assets D) wealth

A

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________. A) rise; increases B) rise; stabilizes C) rise; decreases D) fall; increases E) fall; stabilizes

A

The higher the standard deviation of returns on an asset, the ________ the asset's ________. A) greater; risk B) smaller; risk C) greater; expected return D) smaller; expected return

A

What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called? A) econometric model B) liquidity preference framework C) market equilibrium D) Fisher effect

A

When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; falls B) right; rises C) left; falls D) left; rises

A

When the demand for bonds ________ or the supply of bonds ________, bond prices rise. A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases

A

When the economy enters into a boom, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; rises D) decreases; increases; rises

A

When the growth rate of the money supply increases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect.

A

When the inflation rate is expected to increase, the expected return on bonds relative to real assets falls for any given interest rate; as a result, the ________ bonds falls and the ________ curve shifts to the left. A) demand for; demand B) demand for; supply C) supply of; demand D) supply of; supply

A

When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) above; demand; fall B) above; demand; rise C) below; supply; fall D) above; supply; rise

A

When the price of a bond is below the equilibrium price, there is excess ________ in the bond market and the price will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

A

An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise

B

An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets, and shift the ________ curve to the left. A) reduce; financial; demand B) reduce; real; demand C) raise; financial; supply D) raise; real; supply

B

During an economic expansion, the supply of bonds ________ and the supply curve shifts to the ________. A) increases, left B) increases, right C) decreases, left D) decreases, right

B

Factors that can cause the supply curve for bonds to shift to the left include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) an increase in government deficits. D) only A and C of the above.

B

Holding everything else constant, a decrease in the money supply causes A) interest rates to decline initially. B) interest rates to increase initially. C) bond prices to increase initially. D) both A and C of the above. E) both B and C of the above.

B

In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left

B

Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________ A) increase; left. B) increase; right. C) decrease; left. D) decrease; right.

B

The loanable funds framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________ A) expected inflation; bonds. B) expected inflation; money. C) government budget deficits; bonds. D) the supply of money; bonds.

B

When bond prices become less volatile, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; falls D) decreases; rises

B

When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

B

When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

B

When the demand for bonds ________ or the supply of bonds ________, interest rates fall. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

B

When the interest rate on a bond is above the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

B

Milton Friedman contends that it is entirely possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation. A) fall; liquidity B) fall; risk C) rise; liquidity D) rise; risk

C

When comparing the loanable funds and liquidity preference frameworks of interest rate determination, which of the following is true? A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation. B) The loanable funds framework provides a simpler analysis of the effects of changes in income, the price level, and the supply of money. C) In most instances, the two approaches to interest rate determination yield the same predictions. D) All of the above are true. E) Only A and B of the above are true.

C

When the expected inflation rate decreases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

C

When the federal government's budget deficit decreases, the ________ curve for bonds shifts to the ________. A) demand; right B) demand; left C) supply; left D) supply; right

C

When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) below; demand; rise B) below; demand; fall C) below; supply; rise D) above; supply; fall

C

When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

C

When the quantity of bonds demanded equals the quantity of bonds supplied, there is A) excess supply. B) excess demand. C) a market equilibrium. D) an asset market approach.

C

If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if A) there is fast adjustment of expected inflation. B) there is slow adjustment of expected inflation. C) the liquidity effect is smaller than the expected inflation effect. D) the liquidity effect is larger than the other effects.

D

The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. A) falls; supply B) falls; quantity supplied C) rises; supply D) rises; quantity supplied

D

When bond prices become more volatile, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; falls D) decreases; rises

D

When bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

D

When people begin to expect a large run up in stock prices, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

D

When stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

D

When the demand for bonds ________ or the supply of bonds ________, bond prices fall. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

D

When the demand for bonds ________ or the supply of bonds ________, interest rates rise. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

D

When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

D

When the growth rate of the money supply decreases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect.

D

True/False A person who is risk averse prefers to hold assets that are more, not less, risky.

FALSE

When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

B

When the growth rate of the money supply is decreased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A) larger; rapid B) larger; slow C) smaller; slow D) smaller; rapid

B

If the Fed wants to permanently lower interest rates, then it should lower the rate of money growth if A) there is fast adjustment of expected inflation. B) there is slow adjustment of expected inflation. C) the liquidity effect is smaller than the expected inflation effect. D) the liquidity effect is larger than the other effects.

C

If the liquidity effect is smaller than the other effects, and the adjustment of expected inflation is slow, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth.

C

In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms: A) real assets and financial assets. B) stocks and bonds. C) money and bonds. D) money and gold.

C

A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets. A) reduce; financial B) reduce; real C) raise; financial D) raise; real

D

A higher level of income causes the demand for money to ________ and the interest rate to ________ A) decrease; decrease. B) decrease; increase. C) increase; decrease. D) increase; increase.

D

Factors that cause the demand curve for bonds to shift to the left include A) an increase in the inflation rate. B) an increase in the liquidity of stocks. C) a decrease in the volatility of stock prices. D) all of the above. E) none of the above.

D

When the federal government's budget deficit increases, the ________ curve for bonds shifts to the ________. A) demand; right B) demand; left C) supply; left D) supply; right

D

When the growth rate of the money supply is increased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A) larger; rapid B) larger; slow C) smaller; slow D) smaller; rapid

D

When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ________ bonds increases and the ________ curve shifts to the right. A) demand for; demand B) demand for; supply C) supply of; demand D) supply of; supply

D

When the interest rate on a bond is below the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

D

When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and the price will ________. A) above; rise B) above; fall C) below; fall D) below; rise

D

True/False An increase in an asset's expected return relative to that of an alternative asset, holding everything else unchanged, raises the quantity demanded of the asset.

TRUE

True/False An increase in the federal government budget deficit will raise the interest rate on bonds.

TRUE

True/False Interest rates are procyclical in that they tend to rise during business cycle expansions and fall during recessions.

TRUE

True/False Investors make their choices of which assets to hold by comparing the expected return, liquidity, and risk of alternative assets.

TRUE

True/False The more liquid an asset is relative to alternative assets, holding everything else unchanged, the more desirable it is, and the greater the quantity demanded.

TRUE

True/False When an economy grows out of a recession, normally the demand for bonds increases and the supply of bonds increases.

TRUE

True/False When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right.

TRUE

A ________ prefers stock in a less risky asset than in a riskier asset. A) risk preferrer B) risk-averse person C) risk lover D) risk-favorable person

B

A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________ A) decrease; right. B) decrease; left. C) increase; right. D) increase; left.

B

A decline in the price level causes the demand for money to ________ and the demand curve to shift to the ________ A) decrease; right. B) decrease; left. C) increase; right. D) increase; left.

B

An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________. A) increase, left B) increase, right C) decrease, left D) decrease, right

B