ECON 2035 chapter 4
11) A decrease in real GDP will result in a(n) ________ in the demand for money and cause the nominal interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase
A
12) As a person's wealth increases, which of the following portfolio holdings is likely to increase the least? A) checking account B) stocks C) money market fund D) bonds
A
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 B) large company stocks C) corporate bonds D) Treasury bills
A
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. B) A higher cost of information corresponds with a low return. C) A low cost of acquiring information corresponds with a high return. D) A higher return results in a lower cost of acquiring information.
A
18) Risk that is common to all assets of a certain type is referred to as A) systematic risk. B) unsystematic risk. C) idiosyncratic risk. D) structural risk.
A
26) Which type of investor is most likely to have a diversified portfolio? A) risk averse B) risk loving C) risk neutral D) risk tolerant
A
27) Diversification is most effective in reducing A) market risk. B) systemic risk. C) idiosyncratic risk. D) all forms of risk.
A
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 A) market risk. B) systemic risk. C) idiosyncratic risk. D) liquidity risk.
A
7) If there is an excess demand for bonds at a given price of bonds, then A) the interest rate will fall. B) the interest rate will rise. C) the price of bonds will fall. D) the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.
A
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. B) Investors may be unable to buy different assets during a "Black Swan" event. C) Some assets may rise while others decline during a "Black Swan" event. D) Black Swan events are surprises and thus one cannot prepare for such an event.
A
A decrease in expected inflation A) usually leads to falling nominal interest rates. B) results in increased nominal capital gains on physical assets. C) will shift the bond demand curve to the left. D) will shift the supply curve for loanable funds to the left.
A
A rise in expected inflation will result in all of the following EXCEPT A) lower nominal interest rates. B) lower real interest rates. C) reduced demand for bonds. D) increased supply of bonds.
A
A small open economy A) is unable to affect the world real interest rate by its borrowing and lending decisions. B) will always be a net borrower from abroad. C) will always be a net lender abroad. D) is almost never able to borrow abroad.
A
An increase in expected inflation will A) increase the nominal interest rate on both short-term and long-term bonds. B) decrease the nominal interest rate on both short-term and long-term bonds. C) increase the nominal interest rate on short-term bonds but not affect the nominal interest rate on long-term bonds. D) increase the nominal interest rate on long-term bonds but not affect the nominal interest rate on short-term bonds.
A
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. B) increased supply of bonds due to an increase in the expected return on bonds relative to stocks. C) reduced demand for bonds due to a decrease in the expected return on bonds relative to stocks. D) reduced demand for bonds due to an increase in the expected return on bonds relative to stocks.
A
During an economic recession A) the bond demand and supply curves both shift to the left and the equilibrium interest rate usually falls. B) the bond demand and supply curves both shift to the right and the equilibrium interest rate usually rises. C) the bond demand curve shifts to the right, the bond supply curve shifts to the left, and the equilibrium interest rate usually falls. D) the bond demand curve shifts to the left, the bond supply curve shifts to the right, and the equilibrium interest rate usually rises.
A
During most of the time in recent decades, the domestic government sector was A) a net borrower. B) a net lender. C) neither a borrower nor a lender. D) a major factor in keeping real interest rates low.
A
How can a global savings glut affect the United States? A) It can reduce the world real interest rate, thus encouraging borrowing by Americans. B) It can increase the world real interest rate, thus encouraging saving by Americans. C) It can reduce the supply of loanable funds for the United States. D) It can reduce the demand for loanable funds for the United States.
A
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. B) the supply curve for loanable funds will shift to the right. C) the demand curve for loanable funds will shift to the left. D) the equilibrium interest rate will fall.
A
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. B) the bond supply curve will shift to the right and the real interest rate will fall. C) government borrowing will be increased. D) the government's deficit will increase.
A
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. B) the demand curve for bonds shifts to the left. C) the equilibrium interest rate rises. D) the equilibrium price of bonds falls.
A
In the bond market, the buyer is considered to be A) the lender. B) the borrower. C) the lender or the borrower, depending upon the use to which the funds are put. D) the lender or the borrower, depending upon whether interest rates are rising or falling.
A
In the market for loanable funds, the seller is considered to be A) the lender. B) the borrower. C) the lender or the borrower depending upon the use to which the funds are put. D) the lender or the borrower depending upon whether interest rates are rising or falling.
A
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. B) the demand curve for bonds shifts more to the left than does the supply curve for bonds. C) the supply curve for bonds shifts to the left and the demand curve for bonds shifts to the right. D) the demand curve for bonds shifts to the left and the supply curve for bonds shifts to the right.
A
Suppose that Congress passes an investment tax credit. The likely result will be A) the supply curve for bonds will shift to the right. B) the demand curve for bonds will shift to the left. C) the demand curve for bonds will shift to the right. D) the equilibrium interest rate will fall.
A
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. B) the demand curve for loanable funds shifts to the left. C) the equilibrium interest rate falls. D) the equilibrium price of bonds rises.
A
The demand curve for bonds would be shifted to the left by A) an increase in expected returns on other assets. B) a decrease in the information costs of bonds relative to other assets. C) a decrease in expected inflation. D) an increase in the liquidity of bonds relative to other assets.
A
The formula for the yield to maturity, i, on a discount bond is A) i = (Face value - Price)/Price. B) i = (Price - Face value)/Price. C) i = (Face value - Price)/Face value. D) i = (Price - Face value)/Face value.
A
The supply curve for bonds would be shifted to the left by A) a decrease in government borrowing. B) a decrease in the corporate tax on profits. C) an increase in tax subsidies for investment. D) an increase in expected inflation.
A
The supply curve for loanable funds would increase due to a(n) A) increase in wealth. B) increase in expected inflation. C) decrease in the liquidity of bonds relative to other assets. D) increase in the information costs of bonds relative to other assets.
A
The two most important factors that cause the money demand curve to shift are A) real GDP and the price level. B) nominal GDP and the Fed. C) the price level and the nominal interest rate. D) the nominal interest rate and the money supply.
A
Which of the following is NOT a likely impact on the bond market if corporations become convinced that a robust economic recovery is underway? A) increased demand for bonds B) increased supply of bonds C) lower bond prices D) higher interest rates
A
Which of the following is the most likely explanation of Japan's very low market interest rates in the early 2000s? A) expected deflation B) an increasing budget deficit C) an increasing trade surplus D) an increase in corporate profits
A
Which of the following will cause the money demand curve to shift to the left? A) a decrease in real GDP B) an increase in the price level C) a decrease in the nominal interest rate D) an increase in the supply of money
A
1) Investors value liquidity in an asset because A) liquid assets tend to have high rates of return. B) liquid assets incur lower selling costs. C) liquid assets incur lower tax liabilities. D) whereas liquid assets have high information costs, their low risk offsets this.
Answer: B
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? A) -20% B) 0% C) 10% D) 20%
B
14) Given that most investors tend to be risk averse A) no one buys risky assets. B) there's a trade-off between risk and return. C) low risk assets provide the best return. D) it must be a superior strategy compared to one that is risk loving.
B
17) Since all assets typically do NOT move together, how can investors typically reduce risk? A) purchase only the best performing assets B) diversify one's portfolio across different asset classes C) avoid poor performing assets D) actively manage one's portfolio
B
21) Which is the best example of idiosyncratic risk? A) a financial crisis B) a lawsuit because the corporation produced a faulty product C) a recession D) rising interest rates
B
22) An investor who desires the ability to have quick and easy access to cash would prefer to hold which type of asset? A) risky B) liquid C) tax free D) any form of bond
B
6) The average investor must weigh the benefits of liquidity against A) the high taxes generally levied on liquid assets. B) the lower returns on liquid assets. C) the high transactions costs involved in disposing of liquid assets. D) the greater variability in the nominal returns on liquid assets.
B
7) Why do CDs have lower rates of return than stocks? A) CDs are much riskier investments than stocks. B) CDs are less risky than stocks. C) CDs are not taxed while stocks' returns are taxable. D) CDs are not as liquid as stocks.
B
8) If there is an excess supply of bonds at a given price of bonds, then A) the interest rate will fall. B) the interest rate will rise. C) the price of bonds will rise. D) the interest rate may rise or the interest rate may fall depending upon the reasons for the excess supply for bonds.
B
A closed economy is one that A) has no government sector. B) neither borrows from nor lends to foreign countries. C) produces mainly agricultural goods. D) produces mainly manufactured goods.
B
A decrease in money supply will result in a(n) ________ in the quantity of money demanded and cause the nominal interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase
B
A one-year discount bond with a face value of $1,000 has an interest rate of 4%. What is its price? A) $960 B) $961.54 C) $996 D) $1,040
B
According to the Fisher effect, an increase in expected inflation results in A) lower nominal interest rates. B) higher nominal interest rates. C) lower real interest rates. D) higher real interest rates.
B
Alternating periods of economic expansion and recession are known as the A) Fisher effect. B) business cycle. C) market risk. D) systematics.
B
An increase in the corporate profits tax is likely to cause A) the equilibrium interest rate to rise and the equilibrium price of bonds to fall. B) the equilibrium interest rate to fall and the equilibrium price of bonds to rise. C) the equilibrium interest rate and the equilibrium price of bonds to both rise. D) the equilibrium interest rate and the equilibrium price of bonds to both fall.
B
An open economy is one that A) has a large government sector. B) lends and borrows in the international capital market. C) produces mainly agricultural goods. D) produces mainly manufactured goods.
B
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 A) higher demand for bonds. B) higher real interest rates. C) lower nominal interest rates. D) higher price of bonds.
B
During a period of economic expansion, when expected profitability is high A) the demand curve for bonds shifts to the left. B) the supply curve of bonds shifts to the right. C) the equilibrium interest rate falls. D) the equilibrium price of bonds rises.
B
During an economic recession A) the demand and supply curves for bonds both shift to the right and the equilibrium interest rate usually rises. B) the demand and supply curves for bonds both shift to the left and the equilibrium interest rate usually falls. 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 falls. D) the demand curve for bonds shifts to the left, the supply curve for bonds shifts to the right, and the equilibrium interest rate usually rises.
B
During most of the time in recent decades, the government sector A) has not spent more than it collected in taxes. B) has run large deficits. C) has run large surpluses. D) has balanced its budget every year.
B
In a large open economy A) domestic lending and borrowing decisions have no impact on the world real interest rate. B) an increase in the domestic supply of loanable funds would lower the world real interest rate. C) the domestic equilibrium real interest rate is determined independently of foreign borrowing and lending. D) an increase in the domestic demand for loanable funds would lower the world real interest rate.
B
Higher expected inflation ________ the supply of bonds and ________ the demand for bonds. A) increases; increases B) increases; reduces C) reduces; increases D) reduces; reduces
B
If a government's income tax receipts exceed its expenditures, the government is running a A) surplus and is a net borrower of funds. B) surplus and is a net saver of funds. C) deficit and is a net borrower of funds. D) deficit and is a net saver of funds.
B
If a large open economy, like the United States, reduces its budget deficit, what impact would this have on a small open economy? A) higher savings B) increased investment C) increased net savings D) no change in interest rates
B
If expected inflation declines by 2%, what should happen to nominal interest rates according to the Fisher effect? A) rise by 2% B) fall by 2% C) be cut in half D) double in size
B
If the Fed increases the money supply and as a result, households and firms buy more short- term financial assets, the prices of those short-term financial assets will ________ and the interest rates on those assets will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall
B
If the federal government decreases its spending and doesn't decrease taxes, the bond supply shifts to the A) left and the equilibrium interest rate rises. B) left and the equilibrium interest rate falls. C) right and the equilibrium interest rate rises. D) right and the equilibrium interest rate falls.
B
In an open economy, desired domestic lending A) must equal desired domestic borrowing. B) must equal desired domestic borrowing plus the amount of international lending. C) is always greater than desired domestic borrowing. D) is always less than desired domestic borrowing.
B
In recent decades, the United States A) was essentially a closed economy. B) was generally a net borrower of foreign funds. C) was generally a net lender abroad. D) experienced a net outflow of savings.
B
In the bond market, the seller is considered to be A) the lender. B) the borrower. C) the lender or the borrower depending upon the use to which the funds are put. D) the lender or the borrower depending upon whether interest rates are rising or falling.
B
Monetary policy has traditionally focused on the A) long-term nominal interest rate. B) short-term nominal interest rate. C) long-term real interest rate. D) short-term real interest rate.
B
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 A) the country's real interest rate would remain below the world level. B) the country would become a net lender abroad. C) the country would become a new borrower abroad. D) the amount of loanable funds supplied in the country would decline.
B
The demand curve for bonds would be reduced by A) a decrease in expected returns on other assets. B) an increase in the information costs of bonds relative to other assets. C) an increase in wealth. D) an increase in the liquidity of bonds relative to other assets.
B
The demand for bonds is A) equivalent to the demand for loanable funds. B) equivalent to the supply of loanable funds. C) represented by an upward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds demanded is on the horizontal axis. D) represented by a downward-sloping line when the interest rate is on the vertical axis and the quantity of bonds demanded is on the horizontal axis.
B
The supply curve for bonds would be shifted to the right by A) a decrease in expected profitability. B) a decrease in the corporate tax on profits. C) a decrease in tax subsidies for investment. D) a decrease in government borrowing.
B
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 ________. A) high; high B) high; low C) low; high D) low; low
B
When nominal interest rates fall on financial assets such as U.S. Treasury bills, the amount of interest that households and firms A) gain by holding money decreases. B) lose by holding money decreases. C) lose by holding money increases. D) lose or gain by holding money does not change.
B
Which of the following will cause the money demand curve to shift to the right? A) a decrease in real GDP B) an increase in the price level C) an increase in the nominal interest rate D) a decrease in the supply of money
B
Which of the following would NOT cause the demand curve for bonds to shift? A) a change in wealth B) a change in the price of bonds C) a change in the liquidity of bonds D) a change in expected inflation
B
11) Suppose there's an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%. What is the expected rate of return on the stock? A) -40% B) -20% C) 8% D) 16%
C
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%? A) risk loving investor B) risk neutral investor C) risk averse investor D) Risk is not relevant in this example.
C
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? A) Google B) Walmart C) Ford D) General Electric
C
24) An investor who bases the decision to buy an asset solely on the expected return of an asset is considered to be A) risk loving. B) risk averse. C) risk neutral. D) risk avoiding.
C
3) Economists believe that as a saver's wealth increases, the saver will generally A) increase his or her holdings of all assets proportionately. B) increase the fraction of wealth held as cash. C) increase the fraction of wealth held as common stock. D) decrease the fraction of wealth held as corporate bonds.
C
4) As wealth decreases, which of the following is likely to account for a smaller fraction of a saver's portfolio? A) stocks B) corporate bonds C) cash D) U.S. government securities
C
8) Which of the following can best be characterized as a "Black Swan" event? A) decline in stock prices due to a recession B) rising market interest rates as the Fed tightens monetary policy C) a financial crisis causing credit to dry up D) an individual firm unexpectedly filing for bankruptcy
C
A one-year discount bond with a face value of $1,000 that is currently selling for $900 has an interest rate of A) 5.26%. B) 10%. C) 11.1%. D) 100%.
C
A one-year discount bond with a face value of $10,000 that is currently selling for $9,400 has an interest rate of A) 3.10%. B) 6%. C) 6.38%. D) 60%.
C
As a result of higher expected inflation A) the demand and supply curves for bonds both shift to the right and the equilibrium interest rate usually rises. B) the demand and supply curves for bonds both shift to the left and the equilibrium interest rate usually falls. 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. D) the demand curve for bonds shifts to the left, the supply curve for bonds shifts to the right, and the equilibrium interest rate usually rises.
C
As wealth increases in the economy, savers are willing to A) hold more cash relative to their holdings of bonds. B) buy fewer bonds at any given price. C) buy more bonds at any given price. D) lend less at any given interest rate.
C
As wealth increases in the economy, we would expect to observe A) bond prices and interest rates both rise. B) bond prices and interest rates both fall. C) bond prices rise and interest rates fall. D) bond prices fall and interest rates rise.
C
Businesses typically issue bonds to finance A) their inventories. B) payments to their workers. C) spending on new plant and equipment. D) dividend payments to their stockholders.
C
Consider an open economy that is a net borrower (like the United States). What would be the impact of a shift to a closed economy? A) domestic interest rates would decline B) domestic savings would decline C) domestic investment would decline D) net borrowing would increase
C
How is the interest rate that prevails in the bond market determined? A) by the interaction of stock prices and bond prices B) by the decision of the president, in consultation with Congress C) by the intersection of the demand for and supply of bonds D) by the Board of Governors of the New York Stock Exchange
C
If bond investors think they lack enough details to evaluate the likelihood of defaults on certain bonds, this will result in higher A) expected return. B) liquidity. C) information costs. D) expected inflation.
C
If the Fed decreases the money supply and as a result, households and firms buy fewer short- term financial assets, the prices of those short-term financial assets will ________ and the interest rates on those assets will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall
C
Since Germany is a large open economy, the increase in German borrowing and investment in what was formerly East Germany in the early 1990s resulted in A) a decline in the world real interest rate. B) a shift to the right in the German supply of loanable funds curve. C) an increase in the real interest rate in the United States. D) a shift to the left in the German demand for loanable funds curve.
C
The bond demand curve slopes down because A) interest rates decline as bond prices decline. B) when bond prices are low, inflation is low. C) the lender is willing and able to purchase more bonds when the price of the bond is low. D) the borrower is willing and able to purchase more bonds when the price of the bond is low.
C
The bond supply curve A) shows the quantity of bonds lenders are willing to supply as bond prices change. B) shows the quantity of bonds lenders are willing to supply as interest rates change. C) shows the quantity of bonds borrowers are willing to supply as bond prices change. D) is represented by a downward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds supplied is on the horizontal axis.
C
The demand curve for bonds would be shifted to the left by an A) increase in wealth. B) increase in expected returns on bonds. C) increase in expected inflation. D) increase in the liquidity of bonds relative to other assets.
C
The equilibrium real interest rate in Belgium will be A) generally above the world real interest rate. B) generally below the world real interest rate. C) equal to the world real interest rate. D) determined by the equilibrium between desired domestic saving and desired domestic investment.
C
The expected change in the supply and demand for bonds due to an increase in expected inflation will definitely result in A) an increase in the equilibrium price of bonds. B) an increase in the equilibrium quantity of bonds. C) a decrease in the equilibrium price of bonds. D) a decrease in the equilibrium quantity of bonds.
C
The supply curve of loanable funds slopes up because A) at higher bond prices more loanable funds will be supplied. B) higher interest rates reduce the inflation rate. C) an increase in the interest rate makes lenders more willing and able to supply more funds. D) a decrease in the interest rate makes lenders more willing and able to supply more funds.
C
The world real interest rate is A) set annually by a special commission at the United Nations. B) set annually by a special commission at the International Monetary Fund. C) determined in the international capital market. D) determined daily on the New York Stock Exchange.
C
When nominal interest rates fall on financial assets such as U.S. Treasury bills, the amount of interest that households and firms A) gain by holding money decreases. B) lose by holding money decreases. C) lose by holding money increases. D) lose or gain by holding money does not change.
C
When nominal interest rates rise on financial assets such as U.S. Treasury bills, the amount of interest that households and firms A) gain by holding money increases. B) lose by holding money decreases. C) lose by holding money increases. D) lose or gain by holding money does not change.
C
2) A portfolio is a A) brokerage house specializing in the trading of common stock. B) brokerage house specializing in the trading of corporate bonds. C) measure of the risk involved with a holding a particular asset. D) collection of assets.
D
20) Which combination of assets represents the most diversification? A) holding corporate and Treasury bonds B) holding shares of Google and Yahoo C) holding shares of Google and Microsoft D) holding shares of Google along with Treasury bonds
D
23) If a small open economy reduces its budget deficit, the result will be A) a lower world real interest rate, but no change in the domestic real interest rate. B) a lower domestic real interest rate, but no change in the world real interest rate. C) lower domestic and world real interest rates. D) no change in either the domestic or world real interest rate.
D
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? A) bonds B) stocks C) house D) checking account
D
25) Which of the following assets had both the lowest average annual return and lowest risk between 1926 and 2015? A) small company stocks B) large company stocks C) long-term corporate bonds D) U.S. Treasury bills
D
5) As wealth decreases, which of the following is likely to account for a larger fraction of a saver's portfolio? A) corporate stock B) corporate bonds C) U.S. government securities D) checking account balance
D
An increase in expected inflation results in A) lower nominal interest rates and higher bond prices. B) lower real interest rates and higher bond prices. C) higher real interest rates and lower bond prices. D) higher nominal interest rates and lower bond prices.
D
An increase in the price level will result in a(n) ________ in the demand for money and cause the nominal interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase
D
As wealth decreases in the economy, savers are likely to A) hold less cash relative to their holdings of bonds. B) buy more bonds at any given price. C) lend more at any given interest rate. D) lend less at any given interest rate.
D
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 right. B) the supply curve for loanable funds will shift to the right. C) the equilibrium interest rate will fall. D) the equilibrium interest rate will rise.
D
If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate A) would fall. B) would rise. C) would be unaffected. D) might either rise or fall.
D
In the market for loanable funds the price of the funds exchanged is A) the price of bonds. B) the volume of bonds purchased. C) the volume of bonds sold. D) the interest rate.
D
Loanable funds refers to A) only those funds loaned from one bank to another. B) only those funds loaned to banks by the Federal Reserve. C) only those funds loaned by banks to private individuals. D) all those funds changing hands between lenders and borrowers in the bond market.
D
Other things equal, an increase in the tax on dividends is likely to result in all of the following EXCEPT A) higher expected return on bonds relative to stocks. B) increased demand for bonds. C) lower interest rates. D) higher interest rates.
D
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 A) a shift to the left in the demand curve for municipal bonds. B) a shift to the left in the supply curve for municipal bonds. C) an increase in the equilibrium interest rate. D) a decrease in the equilibrium interest rate.
D
Suppose that there is concern about the stability of the global financial system causing a flight to the safety of U.S. government bonds. Which of the following is NOT a likely consequence? A) higher price of U.S. government bonds B) lower interest rate on U.S. government bonds C) increased demand for U.S. government bonds D) reduced supply of U.S. government bonds
D
The bond supply curve slopes up because A) interest rates rise as bond prices rise. B) when bond prices are high, inflation is high. C) the lender is willing and able to offer more bonds when the price of the bond is low. D) the borrower is willing and able to offer more bonds when the price of the bond is high.
D
The demand curve for loanable funds slopes down because A) at lower bond prices more loanable funds will be supplied. B) lower interest rates reduce the inflation rate. C) an increase in the interest rate makes borrowers more willing and able to demand more funds. D) a decrease in the interest rate makes borrowers more willing and able to demand more funds.
D
The idea that nominal interest rates rise or fall one-for-one with expected inflation is known as A) market risk. B) systematic risk. C) idiosyncratic risk. D) the Fisher effect.
D
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. A) increase; higher B) increase; lower C) reduce; higher D) reduce; lower
D
Which of the following is NOT a reason that interest rates remained low despite high budget deficits following the financial crisis? A) increased demand for U.S. government bonds B) the perceived riskiness of alternative investments such as stocks C) low interest rates on corporate bonds and similar short-term assets D) increases in expected inflation
D
Which of the following is a possible impact of a global savings glut on a small open economy? A) interest rate would increase B) interest rate would decrease C) domestic savings would increase D) domestic investment would increase
D
Which of the following statements is correct? A) The supply curve for loanable funds slopes up, whereas the supply curve for bonds slopes down. B) The demand curve for loanable funds slopes up, whereas the demand curve for bonds slopes down. C) The demand curve for loanable funds and the demand curve for bonds both slope up. D) The supply curve for bonds and the supply curve for loanable funds both slope up.
D
What is a black swan event?
It refers to rare events that have a significant impact on society or the economy.
How can diversification reduce idiosyncratic risk but not systematic risk?
Since the returns on most assets do not move together, holding different asset classes reduces idiosyncratic risk. However, systematic risk is common to all assets, so holding different assets will not reduce systematic risk.
29) If you think that there is a 75% chance of a stock increasing by 8% and a 25% change of it falling by 20%, what is the expected return on the stock? Report using percentages with two decimal places.
The expected return is (0.75 × 8%) + (0.25 × -20%) = 1.00%.
How should a financial plan of an older saver differ from that of a younger saver?
The older saver has a shorter time horizon. The financial goal should be to conserve existing funds to earn a rate slightly above inflation. The portfolio plan should be to reduce risk by selecting safe assets to earn an expected return after inflation of about zero.
Suppose you are risk averse and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?
The second investment has an expected return of (0.5 × 10%) + (0.5 × 0%) = 5%. Since the two investments have the same expected return and you are risk averse, you choose the first investment.
31) Suppose you are risk loving and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?
The second investment has an expected return of (0.5 × 10%) + (0.5 × 0%) = 5%. Since the two investments have the same expected return and you are risk loving, you choose the second investment. Risk loving investors prefer to gamble on possibly earning a higher return.
Suppose you are risk neutral and you are deciding between two investments. One has a guaranteed return of 2% while the second has a 60% chance of a 10% return and a 40% chance of a -5% return. Which investment would you choose? Why?
The second investment has an expected return of (0.6 × 10%) + (-5% × .4) = 4%. Since this is greater than the expected return of the first investment, you choose the second investment.