ch 4 practice questions

12) If the expected gains on stocks rise, while the expected returns on bonds do NOT change, then

D) the equilibrium interest rate will rise.

10) The idea that nominal interest rates rise or fall one-for-one with expected inflation is known as

D) the Fisher effect.

15) The bond supply curve slopes up because

D) the borrower is willing and able to offer more bonds when the price of the bond is high.

10) Suppose there's a 50% chance of a stock rising by 20% and a 50% chance of it falling by 20%. What is the expected rate of return on the stock?

0%

16) Which best describes the relationship between the cost of acquiring information and return?

A) A high return must compensate for a high cost of acquiring information.

9) In an article, "Preparing for the Next Black Swan" (Wall Street Journal, Aug 21, 2010), the point is made that diversification may be insufficient in protecting one's portfolio during a "Black Swan" event. Why may this be TRUE?

A) Virtually all asset classes may decline at the same time.

35) The supply curve for bonds would be shifted to the left by

A) a decrease in government borrowing.

8) Which of the following will cause the money demand curve to shift to the left?

A) a decrease in real GDP

22) The demand curve for bonds would be shifted to the left by

A) an increase in expected returns on other assets.

1) Which of the following is the most likely explanation of Japan's very low market interest rates in the early 2000s?

A) expected deflation

2) The formula for the yield to maturity, i, on a discount bond is

A) i = (Face value - Price)/Price.

3) The supply curve for loanable funds would increase due to a(n)

A) increase in wealth.

19) An increase in expected inflation will

A) increase the nominal interest rate on both short-term and long-term bonds.

38) An increase in the tax rate on dividends, other things equal, is likely to result in a(n)

A) increased demand for bonds due to an increase in the expected return on bonds relative to stocks.

14) A small open economy

A) is unable to affect the world real interest rate by its borrowing and lending decisions.

37) A rise in expected inflation will result in all of the following EXCEPT

A) lower nominal interest rates.

27) Diversification is most effective in reducing

A) market risk.

6) The two most important factors that cause the money demand curve to shift are

A) real GDP and the price level.

26) Which type of investor is most likely to have a diversified portfolio?

A) risk averse

15) Which of the following financial assets has both the highest risk and highest return for the period of 1926-2015?

A) small company stocks

18) Risk that is common to all assets of a certain type is referred to as

A) systematic risk.

4) During an economic recession

A) the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls.

33) If the government increases taxes while holding expenditures constant

A) the bond supply curve will shift to the left and the equilibrium interest rate will fall.

13) If the expected gains on stocks rise, while the expected returns on bonds do NOT change, then

A) the demand curve for bonds will shift to the left.

6) As wealth increases in the economy, savers are willing to

A) the interest rate will fall.

17) In the bond market, the buyer is considered to be

A) the lender.

16) Interest rates typically fall during recessions, suggesting that

A) the supply curve for bonds shifts more to the left than does the demand curve for bonds.

25) In an effort to increase government revenue, Congress and the president decide to increase the corporate profits tax. The likely result will be

A) the supply curve for bonds shifts to the left.

2) The Federal Reserve issues a report indicating that future inflation will be higher than had previously seemed likely. As a result

A) the supply curve for bonds shifts to the right.

27) Suppose that Congress passes an investment tax credit. The likely result will be

A) the supply curve for bonds will shift to the right.

6) A decrease in expected inflation

A) usually leads to falling nominal interest rates.

7) Why do CDs have lower rates of return than stocks?

B) CDs are less risky than stocks.

9) Which of the following would NOT cause the demand curve for bonds to shift?

B) a change in the price of bonds

34) The supply curve for bonds would be shifted to the right by

B) a decrease in the corporate tax on profits.

21) Which is the best example of idiosyncratic risk?

B) a lawsuit because the corporation produced a faulty product

16) In a large open economy

B) an increase in the domestic supply of loanable funds would lower the world real interest rate.

21) The demand curve for bonds would be reduced by

B) an increase in the information costs of bonds relative to other assets.

7) Which of the following will cause the money demand curve to shift to the right?

B) an increase in the price level

17) Since all assets typically do NOT move together, how can investors typically reduce risk?

B) diversify one's portfolio across different asset classes

5) The demand for bonds is

B) equivalent to the supply of loanable funds.

29) During most of the time in recent decades, the government sector

B) has run large deficits.

5) When nominal interest rates on financial assets are high, the opportunity cost of holding money is ________, so the quantity of money demanded by households and firms will be ________.

B) high; low

12) According to the Fisher effect, an increase in expected inflation results in

B) higher nominal interest rates.

14) As a result of the perceived riskiness of alternative investments following the financial crisis of 2007-2009, the bond market was affected in all of the following ways EXCEPT

B) higher real interest rates.

17) Higher expected inflation ________ the supply of bonds and ________ the demand for bonds.

B) increases; reduces

31) If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the

B) left and the equilibrium interest rate falls.

11) An open economy is one that

B) lends and borrows in the international capital market.

1) Investors value liquidity in an asset because

B) liquid assets incur lower selling costs.

3) When nominal interest rates fall on financial assets such as U.S. Treasury bills, the amount of interest that households and firms

B) lose by holding money decreases.

13) In an open economy, desired domestic lending

B) must equal desired domestic borrowing plus the amount of international lending.

1) A closed economy is one that

B) neither borrows from nor lends to foreign countries.

1) Monetary policy has traditionally focused on the

B) short-term nominal interest rate.

28) If a government's income tax receipts exceed its expenditures, the government is running a

B) surplus and is a net saver of funds.

18) In the bond market, the seller is considered to be

B) the borrower.

18) Suppose that a small economy that had previously been closed becomes open. If its real interest rate had previously been below the world real interest rate, we would expect that

B) the country would become a net lender abroad.

5) During an economic recession

B) the demand and supply curves for bonds both shift to the left and the equilibrium interest rate usually falls.

26) An increase in the corporate profits tax is likely to cause

B) the equilibrium interest rate to fall and the equilibrium price of bonds to rise.

8) If there is an excess supply of bonds at a given price of bonds, then

B) the interest rate will rise.

6) The average investor must weigh the benefits of liquidity against

B) the lower returns on liquid assets.

3) During a period of economic expansion, when expected profitability is high

B) the supply curve of bonds shifts to the right.

14) Given that most investors tend to be risk averse

B) there's a trade-off between risk and return.

18) The expected change in the supply and demand for bonds due to an increase in expected inflation will definitely result in

C) a decrease in the equilibrium price of bonds.

8) Which of the following can best be characterized as a "Black Swan" event?

C) a financial crisis causing credit to dry up

23) The supply curve for bonds would decline due to

C) an increase in expected inflation.

4) The supply curve of loanable funds slopes up because

C) an increase in the interest rate makes lenders more willing and able to supply more funds.

11) As wealth increases in the economy, we would expect to observe

C) bond prices rise and interest rates fall.

16) How is the interest rate that prevails in the bond market determined?

C) by the intersection of the demand for and supply of bonds

20) The demand curve for bonds would be shifted to the left by an

C) increase in expected inflation.

3) Economists believe that as a saver's wealth increases, the saver will generally

C) increase the fraction of wealth held as common stock.

2) When nominal interest rates rise on financial assets such as U.S. Treasury bills, the amount of interest that households and firms

C) lose by holding money increases.

4) When nominal interest rates on financial assets are low, the opportunity cost of holding money is ________, so the quantity of money demanded by households and firms will be ________.

C) low; high

14) The bond supply curve

C) shows the quantity of bonds borrowers are willing to supply as bond prices change.

24) Businesses typically issue bonds to finance

C) spending on new plant and equipment.

7) As a result of higher expected inflation

C) the demand curve for bonds shifts to the right, the supply curve for bonds shifts to the left, and the equilibrium interest rate usually rises.

1) The bond demand curve slopes down because

C) the lender is willing and able to purchase more bonds when the price of the bond is low.

32) If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate

D) might either rise or fall.

6) Which of the following statements is correct?

D) The supply curve for bonds and the supply curve for loanable funds both slope up.

19) Suppose that a new bond rating service is established that specializes in rating municipal bonds that had not previously been rated. The likely result would be

D) a decrease in the equilibrium interest rate.

7) The demand curve for loanable funds slopes down because

D) a decrease in the interest rate makes borrowers more willing and able to demand more funds.

2) Loanable funds refers to

D) all those funds changing hands between lenders and borrowers in the bond market.

23) The wealth of most people declined as a result of the financial crisis of 2007-2009. As a result, which asset most likely became a larger portion of their portfolio?

D) checking account

5) As wealth decreases, which of the following is likely to account for a larger fraction of a saver's portfolio?

D) checking account balance

2) A portfolio is a

D) collection of assets.

39) Other things equal, an increase in the tax on dividends is likely to result in all of the following EXCEPT

D) higher interest rates.

9) An increase in expected inflation results in

D) higher nominal interest rates and lower bond prices.

20) Which combination of assets represents the most diversification?

D) holding shares of Google along with Treasury bonds

13) Which of the following is NOT a reason that interest rates remained low despite high budget deficits following the financial crisis?

D) increases in expected inflation

10) As wealth decreases in the economy, savers are likely to

D) lend less at any given interest rate.

11) Alternating periods of economic expansion and recession are known as the

business cycle

4) As wealth decreases, which of the following is likely to account for a smaller fraction of a saver's portfolio?

cash

12) As a person's wealth increases, which of the following portfolio holdings is likely to increase the least?

checking account

8) If expected inflation declines by 2%, what should happen to nominal interest rates according to the Fisher effect?

fall by 2%

19) Suppose that you own $10,000 worth of stock in General Motors. Adding stock in which of the following companies would be least likely to reduce the risk in your portfolio?

ford

22) An investor who desires the ability to have quick and easy access to cash would prefer to hold which type of asset?

liquid

28) In November 2012, HP claimed that they had weak earnings due to questionable accounting by a company that they had taken over. This is an example of

market risk

15) When expected inflation increases, investors ________ their demand for bonds because, for each nominal interest rate, the higher the inflation rate, the ________ the real interest rate investors will receive.

reduce; lower

13) Suppose there's an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%. Which type of investor would prefer an investment with a guaranteed return of 5%?

risk averse investor

24) An investor who bases the decision to buy an asset solely on the expected return of an asset is considered to be

risk neutral

9) In the market for loanable funds the price of the funds exchanged is

the interest rate

8) In the market for loanable funds, the seller is considered to be

the lender