Money and Banking Chapter 3

Holding everything else constant

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

Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant.

increase; decrease; increase

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, when the government has higher budget deficits

the supply curve for bonds shifts to the right and the interest rate rises.

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

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

Consider the market for a 5-year 3% coupon bond with face value $10,000. The demand and supply of the discount bond can be represented by the following equations: , , where is the quantity supplied of the bond, is the quantity demanded of the bond, and is the price of the bond in dollars. What is the equilibrium interest rate (in %) of the coupon bond? Round your answer to at least 2 decimal places.

1.43

Consider the market for a 5-year 3% coupon bond with face value $10,000. The demand and supply of the discount bond can be represented by the following equations: , , where is the quantity supplied of the bond, is the quantity demanded of the bond, and is the price of the bond in dollars. What is the equilibrium price (in $) of the coupon bond? Round your answer to at least 2 decimal places.

10,750

There are three assets to be considered: stocks, bonds, and commodities. The current prices of these assets are listed below: AssetCurrent PriceStocks$500Bonds$1000Commodities$200 The following table lists the possible prices of these assets a year from today, with the corresponding probabilities. StocksBondsCommodities Probability Price Probability Price Probability Price 0.25$7000.4$11000.2$2500.25$6500.6$10500.25$2400.25$600 0.25$2300.25$550 0.3$220 What is the standard deviation of the rate of return (in %) of stocks? Round your answer to at least 2 decimal places.

11.18

There are three assets to be considered: stocks, bonds, and commodities. The current prices of these assets are listed below: AssetCurrent PriceStocks$500Bonds$1000Commodities$200 The following table lists the possible prices of these assets a year from today, with the corresponding probabilities. StocksBondsCommodities Probability Price Probability Price Probability Price 0.25$7000.4$11000.2$2500.25$6500.6$10500.25$2400.25$600 0.25$2300.25$550 0.3$220 What is the expected return (in %) of commodities? Round your answer to at least 2 decimal

16.75

There are three assets to be considered: stocks, bonds, and commodities. The current prices of these assets are listed below: AssetCurrent PriceStocks$500Bonds$1000Commodities$200 The following table lists the possible prices of these assets a year from today, with the corresponding probabilities. StocksBondsCommodities Probability Price Probability Price Probability Price 0.25$7000.4$11000.2$2500.25$6500.6$10500.25$2400.25$600 0.25$2300.25$550 0.3$220 What is the standard deviation of the rate of return (in %) of bonds? Round your answer to at least 2 decimal places.

2.45

There are three assets to be considered: stocks, bonds, and commodities. The current prices of these assets are listed below: AssetCurrentPrice Stocks$500 Bonds$1000 Commodities$200 The following table lists the possible prices of these assets a year from today, with the corresponding probabilities. StocksBondsCommodities Probability Price Probability Price Probability Price 0.25$7000.4$11000.2$2500.25$6500.6$10500.25$2400.25$600 0.25$2300.25$550 0.3$220 What is the expected return (in %) of stocks? Round your answer to at least 2 decimal places.

25.00

Consider the market for a 5-year 3% coupon bond with face value $10,000. The demand and supply of the discount bond can be represented by the following equations: , , where is the quantity supplied of the bond, is the quantity demanded of the bond, and is the price of the bond in dollars. What is the equilibrium quantity of coupon bond traded in the market? Round your answer to at least 2 decimal places.

5,875

There are three assets to be considered: stocks, bonds, and commodities. The current prices of these assets are listed below: AssetCurrent PriceStocks$500Bonds$1000Commodities$200 The following table lists the possible prices of these assets a year from today, with the corresponding probabilities. StocksBondsCommodities Probability Price Probability Price Probability Price 0.25$7000.4$11000.2$2500.25$6500.6$10500.25$2400.25$600 0.25$2300.25$550 0.3$220 What is the standard deviation of the rate of return (in %) of commodities? Round your answer to at least 2 decimal places.

5.54

There are three assets to be considered: stocks, bonds, and commodities. The current prices of these assets are listed below: Asset Current PriceStocks$500Bonds$1000Commodities$200 The following table lists the possible prices of these assets a year from today, with the corresponding probabilities. StocksBondsCommodities Probability Price Probability Price Probability Price 0.25$7000.4$11000.2$2500.25$6500.6$10500.25$2400.25$600 0.25$2300.25$550 0.3$220 What is the expected return (in %) of bonds? Round your answer to at least 2 decimal places.

7.00

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

A decrease; 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

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 the figure above, the decrease in the interest rate from I 1 to I 2 can be explained by

an increase in money growth.

In the market for money, 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

If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.

decreases; increases

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

decreases; 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, everything else equal.

downward; inverse

Holding everything else constant in the market for money, as the interest rate rises, the opportunity cost of holding money ________ thus making money less desirable. So the quantity of money demanded falls.

increases

If 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

If there is an excess supply of money

individuals buy bonds, causing interest rates to fall.

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.

In the market for money, when real income ________, 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

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

supply of; fall

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

supply of; fall

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.