ECON 2035 CH. 5
If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.
decrease, increase
If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.
decrease, increase
When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant.
decrease, increase
Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________.
decrease, left
The bond supply and demand 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 ________.
expected inflation, money
Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________.
fall, left
The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ________ and the demand curve to shift to the ________.
fall, left
If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant.
increase, decrease
If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.
increase, decrease
A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant.
increase, increase
Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant?
wealth
Factors that decrease the demand for bonds include
a decrease in the riskiness of stocks.
When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant.
demand, decrease, fall
When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant.
demand, decreases, fall
When stock prices become more volatile, the ________ curve for gold shifts right and gold prices ________, everything else held constant.
demand, increase
When gold prices become more volatile, the ________ curve for gold shifts to the ________; ________ the price of gold.
demand, left, increasing
If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.
demand, left, rises
When rare coin prices become volatile, the ________ curve for bonds shifts to the ________, everything else held constant.
demand, right
If the interest rate on a bond is above the equilibrium interest rate, there is an excess ________ for bonds and the bond price will ________.
demand, rise
In the loanable funds framework, the ________ curve of bonds is equivalent to the ________ curve of loanable funds.
demand, supply
When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant.
demand, supply
Holding many risky assets and thus reducing the overall risk an investor faces is called
diversification
When the price of a bond decreases, all else equal, the bond demand curve
does not shift
The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity demanded of bonds.
downward, inverse
An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.
falls, falls
If wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant.
increases, increases
When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.
increases, right, falls
Interest rates increased continuously during the 1970s. The most likely explanation is
increasing expected rates of inflation.
If there is an excess supply of money
individuals buy bonds, causing interest rates to fall.
In the loanable funds framework, the ________ is measured on the vertical axis.
interest rate
If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the
interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth.
If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the
interest rate will rise immediately above the initial level when the money supply grows.
The demand for gold increases, other things equal, when
interest rates are expected to rise.
The riskiness of an asset that is unique to the particular asset is
nonsystematic risk
The price of gold should be ________ to the expected inflation rate.
positively related
The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant.
rise, increases
It is 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.
rise, liquidity
Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________.
rise, right
When the price level ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.
rises, right, rises
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________.
rises, rises
If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________.
sell, rise
When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.
supply of, fall
When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________.
supply of, falls
In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable.
supply, supply, right
The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio.
systematic
In contrast to the CAPM, the APT assumes that there can be several sources of ________ that cannot be eliminated through diversification.
systematic risk
You would be more willing to buy AT&T bonds (holding everything else constant) if
the brokerage commissions on bond sales become cheaper.
Everything else held constant, when real estate prices are expected to decrease
the demand curve for bonds shifts to the right and the interest rate falls.
The demand for silver decreases, other things equal, when
the gold market is expected to boom.
The opportunity cost of holding money is
the interest rate
If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if
the liquidity effect is larger than the other effects.
When the growth rate of the money supply increases, interest rates end up being permanently lower if
the liquidity effect is larger than the other effects.
Holding everything else constant,
the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A.
The riskiness of an asset is measured by
the standard deviation of its return.
Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return
when it has a greater systematic risk.
Everything else held constant, when the government has higher budget deficits
the supply curve for bonds shifts to the right and the interest rate rises.
The bond supply curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity supplied of bonds.
upward, direct
In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus,
when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
In the 1990s Japan had the lowest interest rates in the world due to a combination of
deflation and recession
In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.
demand for, rise
An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.
increases
In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________.
interest rate, premium
An increase in the interest rate
decreases the quantity of money demanded.
Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets.
bonds, real
A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant.
decrease, decrease
If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for antiques will ________.
decrease, decrease
When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.
decrease, decrease, falls
Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________.
decrease, left
Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.
decreases, left
decrease in the brokerage commissions in the housing market from 6% to 5% of the sales price will shift the ________ curve for bonds to the ________, everything else held constant.
demand, left
In Keynes's liquidity preference framework,
an excess supply of bonds implies an excess demand for money.
Keynes assumed that money has ________ rate of return.
a zero
In the liquidity preference framework, a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs
at the moment the price level hits its peak (stops rising) because both the price level and expected inflation effects are at work.
If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________.
below, demand
When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________.
below, rise
A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio.
beta
A movement along the bond demand or supply curve occurs when ________ changes.
bond price
________ in the money supply creates excess ________ money, causing interest rates to ________, everything else held constant.
decrease, demand for, rise
A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.
decrease, left
In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall.
falls, money
________ in the money supply creates excess demand for ________, causing interest rates to ________, everything else held constant.
increase, bond, fall
A return to the gold standard, that is, using gold for money will ________ the ________ for gold, ________ its price, everything else held constant.
increase, demand, increasing
An increase in the expected inflation rate will ________ the ________ for gold, ________ its price, everything else held constant.
increase, demand, increasing
A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant.
increase, increase
Discovery of new gold in Alaska will ________ the ________ of gold, ________ its price, everything else held constant.
increase, supply, decreasing
When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________
larger, slow
When the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.
left, rises
) The ________ the returns on two securities move together, the ________ benefit there is from diversification.
less, more
Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.
liquidity
Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the
liquidity effect
Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the
liquidity effect
The demand for Picasso paintings rises (holding everything else equal) when
Treasury securities become riskier.
Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.
more, right, falls
Holding all other factors constant, the quantity demanded of an asset is
positively related to wealth.
An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant.
reduce, real
Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion.
right, right
Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________.
rise, Fisher effect
The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases.
rises, quantity supplied
During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.
rises, right
Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________.
rises, right
When real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.
rises, right, rises
When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.
above, demand, fall
In Keynes's liquidity preference framework, if there is excess demand for money, there is
an excess supply of bonds
) Factors that can cause the supply curve for bonds to shift to the right include
an expansion in overall economic activity.
Pieces of property that serve as a store of value are called
assets
Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.
falls, rises
You would be less willing to purchase U.S. Treasury bonds, other things equal, if
gold becomes more liquid.
The demand for houses decreases, all else equal, when
gold prices are expected to increase.
If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________.
increase, decrease
If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________.
increase, decrease
The interest rate falls when either the demand for bonds ________ or the supply of bonds ________.
increase, decrease
Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant.
increase, decrease, increase
If real estate prices are expected to drop, all else equal, the demand for bonds ________ and the interest rate_______.
increase, falls
When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant.
increase, increase
In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant.
stays where it is
If the interest rate on a bond is below the equilibrium interest rate, there is an excess ________ of bonds and the bond price will ________.
supply, fall
When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.
supply, left
Everything else held constant, when prices in the art market become more uncertain,
the demand curve for bonds shifts to the right and the interest rate falls.
If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________.
decrease, decrease, increase
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.
decrease, increase, rises
During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant.
decrease, left
When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.
demand, fall
If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant.
demand, left
Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________.
falls, falls
An increase in the expected inflation rate causes the supply of bonds to ________ and the supply curve to shift to the ________, everything else held constant.
increase, right
Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.
increase, right
In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.
increase, right
When the interest rate changes,
it is because either the demand or the supply curve has shifted.
If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________.
left, rise
Everything else held constant, 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 ________.
left, rises
Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.
left, rises
In the bond market, the bond demanders are the ________ and the bond suppliers are the ________.
lenders, borrowers
The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.
lower, quantity demanded
In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms:
money and bonds
A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________.
more, fall
Everything else held constant, a decrease in wealth
reduces the demand for silver.