Money and Banking; Chapter 5

1.) Your wealth falls. 2.) You expect the stock to appreciate in value. 3.) The bond market becomes more liquid. 4.) You expect gold to appreciate in value. 5.) Prices in the bond market become more volatile.

1.) Less willing 2.) More willing 3.) Less willing 4.)Less willing 5.) More willing

If the supply of bonds shifts to the right​, the price of bonds_________, and the interest rate __________.

Decreases, Increase

​"The more​ risk-averse people​ are, the more likely they are to​ diversify." Is this statement​ true, false, or​ uncertain?

True because the benefits to diversification are greater for a person who cares more about reducing risk.

If the demand for bonds shifts to the​ left, the price of bonds

decreases, and interest rates rise.

Will there be an effect on interest rates if brokerage commissions on stocks​ fall?

​Yes, interest rates would rise because stocks become more liquid than​ before, which would reduce the demand for bonds

In the aftermath of the global economic crisis that started to take hold in​ 2008, U.S. government budget deficits increased​ dramatically, yet interest rates on U.S. Treasury debt fell sharply and stayed low for quite some time. Does this make​ sense?

​Yes, the decrease in investment opportunities and known risk factors significantly offset the wealth effect on demand and the deficit effect on supply.

What effect will a sudden increase in the volatility of gold prices have on interest​ rates?

Interest rates will decrease because bonds will become relatively less​ risky, which increases the demand for bonds

What will happen to interest rates if the public suddenly expects a large increase in stock​ prices?

Interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases

How might a sudden increase in​ people's expectations of future real estate prices affect interest​ rates?

Interest rates would increase because real estate would have a relatively higher rate of return compared to​ bonds, which would cause the demand for bonds to decrease.

You would be_______________ willing to buy a share of Microsoft stock if you expect gold to appreciate in value because____________.

Less; The return on gold relative to stocks has improved

You would be________________ willing to buy a share of Microsoft stock if the bond market becomes more liquid because __________________.

Less; The return on gold relative to stocks has improved

You would be____________ willing to buy a share of Microsoft stock if your wealth falls because_____________.

Less; you have less money to spend on all of your potential assets.

You would be____________ willing to buy a share of Microsoft stock if you expect the stock to appreciate in value because_______________.

More; You believe the amount of the return on your investment will be positive.

You would be___________ willing to buy a share of Microsoft stock if prices in the bond market become more volatile because _____________.

More;stocks have become relatively safer than bonds.

What would happen to the demand for Rembrandt paintings if the stock market undergoes a​ boom?

The demand for Rembrandt paintings would increase because of the increase in​ people's wealth

​"No one who is​ risk-averse will ever buy a security that has a lower expected​ return, more​ risk, and less liquidity than another​ security." Is this statement​ true, false, or​ uncertain?

True because for a​ risk-averse person, those characteristics make a security less desirable.

What will happen to interest rates if prices in the bond market become more​ volatile?

When bond prices become more​ volatile, bonds become riskier and the demand for bonds will​ fall, which causes interest rates to rise

Would fiscal policy makers ever have reason to worry about potentially inflationary​ conditions?

Yes, higher inflation leads to a higher debt service burden and increases the costs of financing deficit spending.

When the federal government sells a Treasury bond in the primary market long dash—via Treasury​ auction, it​ is:

seeking to finance government spending as an alternative to raising taxes.

When an individual or institution buys a corporate bond in the primary​ market:

she is making a loan to the corporation issuing the bond.

If you are​ risk-averse and had to choose between the stock or the bond​ investments, you would​ choose:

the bond portfolio because there is less uncertainty over the outcome.