Chapter 4 Practice Quiz

Holding everything else constant, a decrease in the money supply causes -interest rates to decline initially. -interest rates to increase initially. -bond prices to increase initially. -both interest rates to decline initially and bond prices to increase initially. - both interest rates to increase initially and bond prices to increase initially.

interest rates to increase initially.

When the expected inflation rate decreases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________. - increases; increases; rises -decreases; decreases; falls -increases; decreases; falls -decreases; increases; rises

increases; decreases; falls

When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________. -right; rises -right; falls - left; falls -left; rises

right; falls

A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________. - fall; fall -fall; rise - rise; fall - rise; rise

rise; fall

In his liquidity preference framework, Keynes assumed that money has a zero rate of return; thus, when interest rates ________ the expected return on money falls relative to the expected return on bonds, causing the demand for money to ________. - rise; fall -rise; rise -fall; fall -fall; rise

rise; fall

When the federal government's budget deficit decreases, the ________ curve for bonds shifts to the ________. -demand; right -demand; left -supply; left -supply; right

supply; left

When the federal governments budget deficit increases, the ________ curve for bonds shifts to the ________. -demand; right -demand; left -supply; left -supply; right

supply; right

An increase in the inflation rate will cause the demand curve for bonds to shift to the right. True False

False

Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset. True False

False

Increased liquidity of alternative assets increases the demand for bonds and shifts the demand curve to the left. True False

False

When the federal government's budget deficit decreases, the demand curve for bonds shifts to the right. True False

False

Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the -Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. - liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. -liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. -Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.

An increase in the riskiness of alternative assets causes the demand for bonds to rise and the demand curve to shift to the right. True False

True

Diversification is almost always beneficial to the risk-averse investor, since it reduces risk unless returns on securities move perfectly together. True False

True

The risk of a well diversified portfolio depends only on the systematic risk of the assets in the portfolio True False

True

When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right. True False

True

________ is the total resources owned by an individual, including all assets. - Expected return -Wealth -Liquidity -Risk

Wealth

________ is the total resources owned by an individual, including all assets. -Wealth - Expected return -Liquidity -Risk

Wealth

A movement along the demand (or supply) curve occurs when the quantity demanded (or supplied) changes at each given price (or interest rate) of the bond in response to a change in some other factor besides the bond's price or interest rate. True False

False

Factors that can cause the supply curve for bonds to shift to the left include - an expansion in overall economic activity. -a decrease in expected inflation. - an increase in government deficits. -only an expansion in overall economic activity and an increase in government deficits.

a decrease in expected inflation.

When the price of a bond is ________ the equilibrium price, there is an excess supply of bonds and the price will ________. -above; rise -above; fall -below; fall -below; rise

above; fall

Factors that can cause the supply curve for bonds to shift to the right include - an expansion in overall economic activity. -a decrease in expected inflation. -a decrease in government deficits. - All of these. -only an expansion in overall economic activity and a decrease in expected inflation.

an expansion in overall economic activity.

When the price of a bond is below the equilibrium price, there is excess ________ in the bond market and the price will ________. - demand; rise -demand; fall -supply; fall -supply; rise

demand; rise

The loanable funds 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; bonds -expected inflation; money -government budget deficits; bonds - the supply of money; bonds

expected inflation; money

An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________. -fall; fall -fall; rise -rise; fall -rise; rise

fall; rise

In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________. -falls; right - falls; left -rises; right -rises; left

falls ; left

As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises. -falls; rises -falls; falls -rises; rises - rises; falls

falls; rises

A higher level of income causes the demand for money to ________ and the interest rate to ________. -decrease; decrease -decrease; increase - increase; decrease -increase; increase

increase; increase

When the growth rate of the money supply increases, interest rates end up being permanently lower if -the liquidity effect is larger than the other effects. -there is fast adjustment of expected inflation. - there is slow adjustment of expected inflation. -the expected inflation effect is larger than the liquidity effect.

the liquidity effect is larger than the other effects

If the Fed wants to permanently lower interest rates, then it should lower the rate of money growth if - there is fast adjustment of expected inflation. -there is slow adjustment of expected inflation. -the liquidity effect is smaller than the expected inflation effect. - the liquidity liquidity effect is larger than the other effects.

the liquidity effect is smaller than the expected inflation effect.