Chapter 5

Everything else held constant, if the expected return on ABC sock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ______ relative to ABC stock and the demand for CBS stock ____.

falls; 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

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

decreases; increases

When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.

decreases; increases; rises

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

decreases; left

Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.

decreases; left

In the 1990s Japan had the lowest interest rates in the world due to a combination of

deflation and recession

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

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

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 the prices of rare coins 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

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

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, everything else equal.

downward; inverse

In the figure above, a factor that could cause the demand for bonds to shift to the right is

expectations of lower interest rates in the future.

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

expectations of lower interest rates in the future.

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

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

Pieces of property that serves as a store value are called:

Assets

What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public?

Bond supply increases and the bond supply curve shifts to the right. The new equilibrium bond price is lower and thus interest rates will increase.

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

decrease; left

Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall.

The expected return on bonds would decrease relative to other assets resulting in a decrease in the demand for bonds. The leftward shift of the bond demand curve results in a new lower equilibrium price for bonds.

Everything else held constant, would an increase in volatility of stock prices have any impact on the demand for rare coins? Why or why not?

Yes, it would cause the demand for rare coins to increase. The increased volatility of stock prices means that there is relatively more risk in owning stock than there was previously and so the demand for an alternative asset, rare coins, would increase.

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

a business cycle expansion.

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.

Factors that decrease the demand for bonds include

a decrease in the riskiness of stocks.

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

an excess supply of bonds implies an excess demand for money.

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.

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 movement along the bond demand or supply curve occurs when ________ changes.

bond price

Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets.

bonds; real

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

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 stock will _____ and that of treasury bills will ____.

decrease; increase

If the price of diamonds is expected to decrease, all else equal, then the demand for diamonds ________ and the demand for platinum ________.

decrease; increase

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

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 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

If prices in the diamond market become less volatile, all else equal, then the demand for diamonds ________ and the demand for gold ________.

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

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

An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ______ the quantity demande of the asset.

increases

If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________.

increases; decreases

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

increases; decreases

I wealth increases, the demand for stocks _______, and that of long-term 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

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

inflation is expected to increase in the future.

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

interest rates are expected to rise.

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, 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.

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

Everything else held constant, a decrease in wealth

reduces the demand for silver

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 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

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

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

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 rise 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

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price 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

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

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

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 prices in the art market become more uncertain

the demand curve for bonds shifts to the right and the interest rate falls.

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.

Holding everything else constant

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

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.

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

there is a business cycle expansion

The demand for Picasso paintings rises (holding everything else equal) when

treasury securities become riskier

The bond supply curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity supplied of bonds, everything else equal.

upward; direct