Econ 3303 Module 5

If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________.

decreases; decreases; increases

When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant

demand; decreases; fall

A 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

If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant?

demand; left

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

In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is

expectations of more profitable investment opportunities

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

________ in the money supply creates excess ________ money, causing interest rates to ________, everything else held constant.

A decrease; demand for; rise

______ in the money supply creates excess demand for ______, causing interest rates to _____, everything else held constant

An increase; bonds; fall

The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the

Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation

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

The interest rate falls when either the demand for bonds _____ or the supply of bonds _____

Increases; decreases

If bond investors think they lack enough details to evaluate the likelihood of defaults on certain bonds, this will result in higher

Information costs

The demand for gold increases, other things equal, when?

Interest rates are expected to 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

The supply curve for bonds would decline due to

an decrease in expected inflation

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

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 curve for bonds would be shifted to the left by

an increase in expected returns on other assets

In the figure above, one factor not responsible for the decline in the demand for money is

an increase in income

In the figure above, the factor responsible for the decline in the interest rate is?

an increase in the money supply

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

As wealth increases in the economy, savers are willing to

buy more bonds at any given price

As wealth increases in the economy, savers are willing to?

buy more bonds at any given price

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

by the intersection of the demand for and supply of bonds

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

In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the

liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation

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

lower nominal interest rates

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

When real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant

rises; right; rises

If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________

sell; rise

Businesses typically issue bonds to finance?

spending on new plant and equipment

In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant

stay where it is

when the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________

supply of; fall

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

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

Holding everything else constant

the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant

increase; 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

When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant

increases; increases

When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant?

increases; increases

Interest rates increased continuously during the 1970s. The most likely explanation is

increasing expected rates of inflation

In the figure above, the price of bonds would fall from P1 to P2 when

inflation is expected to increase in the future

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

A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant

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

decreases; decreases; falls

During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant

decreases; left

Everything else held constant, when households save less, wealth and the demand for bonds _____ and the bond demand curve shifts _____

Decrease; left

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

When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant

Decreases; increases

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

a change in the price of bonds

In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is

a decrease in the expected return on bonds relative to other assets

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

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

has run large deficits

The bond supply curve slopes up because?

he borrower is willing and able to offer more bonds when the price of the bond is high

An increase in expected inflation results in?

higher nominal interest rates and lower bond prices

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

left and the equilibrium interest rate falls

Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ____ and the interest rate _____

left; rise

In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing

price; interest rate

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

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

If the government increases taxes while holding expenditures constant

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

If the government increases taxes while holding expenditures constant?

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

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 the expected gains on stocks rise, while the expected returns on bonds do NOT change, then?

the demand curve for bonds will shift to the left

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

the equilibrium interest rate will rise

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

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

the supply curve for bonds shifts to the right

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

the supply curve of bonds shifts to the right

In the figure above, the price of bonds would fall from P2 to P1 if

there is a business cycle expansion

A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant

increase; increase

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

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

The supply curve for bonds shifts to the left

In Keynes's liquidity preference framework

an excess supply of bonds implies an excess demand for money

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

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

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

fall by 2%

If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________?

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

Everything else help 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

When the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant?

left; rises

As wealth decreases in the economy, savers are likely to

lend less at any given interest rate

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

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