Money Econ Test #2

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In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall.

falls; money

In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was

high

A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant.

increase; increase

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

All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of

interest-rate changes

There is ________ for any bond whose time to maturity matches the holding period.

no interest-rate risk

The opportunity cost of holding money is

the interest rate.

The interest rate on Treasury Inflation Indexed Securities can be roughly interpreted as

the real interest rate

If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is

3 percent

I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is

8 percent

Which of the following are generally TRUE of bonds?

A bond's return equals the yield to maturity when the time to maturity is the same as the holding period

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

An increase; bonds; fall

If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding?

a bond with one year to maturity

A fully amortized loan is another name for

a fixed-payment loan

A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid.

coupon bond; face

If a $1000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is

$37.50

If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is

12 percent

If there is an excess supply of money

individuals buy bonds, causing interest rates to fall.

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.

liquidity

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

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, when the government has higher budget deficits

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

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

upward; direct

A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of

33.3 percent

A $1000 face value coupon bond with a $60 coupon payment every year has a coupon rate of

6 percent

The riskiness of an asset's returns due to changes in interest rates is

interest-rate risk

In which of the following situations would you prefer to be the borrower?

The interest rate is 25 percent and the expected inflation rate is 50 percent.

All of the following are examples of coupon bonds EXCEPT

U.S. Treasury bills

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

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

below; rise

In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________

demand for; rise

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

demand; decreases; fall

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

The price of a consol equals the coupon payment

divided by the interest rate

The interest rate that describes how well a lender has done in real terms after the fact is called the

ex post real interest rate.

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

In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant

increase; right

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

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

The ________ interest rate more accurately reflects the true cost of borrowing.

real


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