LS2

When the government's budgeted expenditures exceed its tax revenues, it is said to have a

budget deficit.

Investors demand more funds at lower interest rates because the

cost of borrowing funds is lower.

During the recent financial crisis, the federal government attempted to rescue the U.S. economy from a deep economic recession by _________ the supply of funds to business and consumers.

increasing

The financial sector of U.S. business is the _________ provider of loanable funds and the _________ user of loanable funds.

largest; largest

A security whose returns are tax-free can pay _______ interest than a taxable security and still be attractive to investors.

lower

The loanable funds theory views the level of interest rates as being determined by

supply and demand for funds.

The equilibrium interest rate for a security is the interest rate where the _______ and ________ intersect. Multiple choice question.

supply curve; demand curve

As the _______ of a financial security decreases, it become more attractive to investors and investors are willing to supply more funds to invest in it. The supply curve shifts right and the interest rate ________.

risk; decreases

The relationship among the real risk-free rate, the expected inflation, and the nominal interest rate is called

the Fisher effect.

An increase in which of the following factors will cause households to increase their supply of loanable funds provided?

Interest rates Household wealth

A highly liquid asset has which of the following characteristics?

Predictable price Can be sold quickly Low transaction cost

An increase in which of the following factors will cause households to decrease their supply of loanable funds provided?

Riskiness of investments Immediate consumption needs

Businesses demand funds for which of the following reasons?

To invest in long-term (fixed) assets like plant and equipment To satisfy short-term working capital needs for inventory and receivables

True or false: Market forces react to disequilibrium with a change in the equilibrium interest rate.

True

The most frequently reported and analyzed yield curve is the curve for

U.S. Treasury securities.

__________ are regarded as having no default risk.

U.S. government securities

If the rate of interest is set below the equilibrium rate, there will be _________ loanable funds.

a deficit of

Due to the value of the conversion option, convertible securities generally pay ________ rate of interest than similar non-convertible securities.

a lower

A security which can be retired by the issuer before its maturity date is referred to as a _________ security.

callable

A risk-free investment is one in which the return is

certain.

When government monetary policy is expansive and the money supply is expanded, interest rates will _______.

decrease

The tendency of foreign investors to invest their funds in risk-free U.S. government securities during times of crisis is referred to as a

flight to quality.

Investors in callable securities generally require _______ interest compared to non-callable securities.

higher

The default risk premium tends to _______ when the economy is _________.

increase; contracting decrease; expanding

The supply of loanable funds _________ with increasing interest rates.

increases

A real risk-free interest rate is what an investor could earn in a world without

inflation.

The prices of securities with longer maturities are ________ sensitive to changes in interest rates when compared to shorter maturity securities.

more

The quoted rates actually observed by investors in financial markets are called ________ rates.

nominal

True or false: The equilibrium interest rate is permanent, since it does not change over time.

False

The difference between the nominal rate quoted on a security and the rate quoted on a Treasury security with similar characteristics is called the

credit risk premium. default risk premium.

The risk that a security issuer will fail to make interest and principal payment on the security is called _______ risk.

default

The non-financial sectors of U.S. business ________ far more loanable funds than they ________.

demand; supply

In a growing economy, the demand for funds is _______ and interest rates will tend to ________.

high; increase

Fill in the blank question. The higher the level of actual or expected inflation, the _____________(higher/lower) will be the prices of good and services in the future.

higher

Foreign investors supply funds to U.S. financial markets when interest rates on U.S. securities are __________ than on comparable securities in their home markets.

higher

The Fisher effect predicts that the ________ expected inflation is, the _________ will be nominal interest rates.

higher, higher lower, lower

The _______ the level of actual or expected inflation, the _______ the level of interest rates.

lower; lower higher; higher

Governments demand funds to finance temporary imbalances between __________ and ___________.

operating revenues; expenditures

The largest net supplier of loanable funds in the U.S. is

households.

As an investor's utility (enjoyment) of assets obtained with borrowed funds increases, the demand for borrowed funds will _______ and interest rates will ________.

increase; increase

The decrease in funds demanded with increasing interest rates will lead to a demand curve that is _________ sloped.

negatively

When local governments temporarily invest tax revenues in financial markets until the funds are needed, they become a _________ of loanable funds.

supplier

The relationship between interest rates and the maturity of securities that differ only in their maturity characteristic is called the term structure of interest rates, or the

yield curve.

Nominal interest rates are important because they affect the _________ of most securities traded in the money and capital markets at home and abroad.

price

When interest rates are high, businesses prefer to finance investments with

retained earnings.

The loanable funds theory categorizes all market participants (consumers, businesses, governments, and foreign participants) as net Blank______ or Blank______ of funds.

suppliers; demanders

Investors are willing to supply more funds at higher interest rates because

their reward is higher.

Over time, the most common shape of the yield curve is _______ indicating that on average, the maturity premium is ________.

positively sloped; positive