Econ 345 ch.5

1) A movement along the bond demand or supply curve occurs when ________ changes. A) bond price B) income C) wealth D) expected return

A

1) 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 ________. A) liquidity effect B) income effect C) price level effect D) expected inflation effect

A

1) Pieces of property that serve as a store of value are called ________. A) assets B) units of account C) liabilities D) borrowings

A

3) The ________ the returns on two securities move together, the ________ benefit there is from diversification. A) less; more B) less; less C) more; more D) more; greater

A

4) A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

A

13) When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant. A) demand; demand B) demand; supply C) supply; demand D) supply; supply

B

14) 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. A) right; left B) right; right C) left; left D) left; right

B

18) The demand for gold increases, other things equal, when ________. A) the market for silver becomes more liquid B) interest rates are expected to rise C) interest rates are expected to fall D) real estate prices are expected to increase

B

2) In Keynes's liquidity preference framework, ________. A) the demand for bonds must equal the supply of money B) the demand for money must equal the supply of bonds C) an excess demand of bonds implies an excess demand for money D) an excess supply of bonds implies an excess demand for money

D

3) When gold prices become more volatile, the ________ curve for gold shifts to the ________; ________ the price of gold. A) supply; right; increasing B) supply; left; increasing C) demand; right; decreasing D) demand; left; decreasing

D

15) If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease

D

2) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the ________. A) interest rate will fall B) interest rate will rise C) interest rate will fall immediately below the initial level when the money supply grows D) interest rate will rise immediately above the initial level when the money supply grows

D

5) When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________. A) above; rise B) above; fall C) below; fall D) below; rise

D

11) In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise

A

12) In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable. A) supply; supply; right B) supply; supply; left C) demand; demand; right D) demand; demand; left

A

13) Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect. A) liquidity B) price level C) expected-inflation D) income

A

6) Everything else held constant, if the expected return on 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 bonds and the demand for GE stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

A

6) The price of gold should be ________ to the expected inflation rate. A) positively related B) negatively related C) inversely related D) unrelated

A

6) The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio. A) systematic B) nonsystematic C) portfolio D) investment

A

7) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return ________. A) when it has a greater systematic risk B) when it has a greater risk in isolation C) when it has a lower systematic risk D) when it has a lower systematic risk and a lower risk in isolation

A

8) ________ in the money supply creates excess ________ money, causing interest rates to ________, everything else held constant. A) A decrease; demand for; rise B) An increase; demand for; fall C) An increase; supply of; rise D) A decrease; supply of; fall

A

9) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return ________. A) when it has a greater systematic risk B) when it has a greater risk in isolation C) when it has a lower systematic risk D) when it has a lower systematic risk and a lower risk in isolation

A

10) A limitation of the CAPM is the assumption that ________. A) there are multiple sources of systematic risk B) there is a single source of systematic risk C) investors have different assessments of expected returns and standard deviations D) they cannot borrow freely at the risk-free rate

B

11) An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant. A) reduce; financial B) reduce; real C) raise; financial D) raise; real

B

3) When real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; right; rises B) rises; right; rises C) falls; left; rises D) rises; left; rises

B

4) A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio. A) alpha B) beta C) CAPM D) APT

B

4) 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 ________. A) expected inflation; bonds B) expected inflation; money C) government budget deficits; bonds D) government budget deficits; money

B

5) 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. A) increase; left B) increase; right C) decrease; left D) decrease; right

B

6) Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets. A) bonds; financial B) bonds; real C) physical; financial D) physical; real

B

6) 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. A) falls; bonds B) falls; money C) rises; bonds D) rises; money

B

6) 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 ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

B

7) 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. A) decrease; right B) decrease; left C) increase; right D) increase; left

B

7) If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

B

1) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms: ________. A) real assets and financial assets B) stocks and bonds C) money and bonds D) money and gold

C

1) In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant. A) shift right B) shift left C) stay where it is D) invert

C

1) The riskiness of an asset is measured by ________. A) the magnitude of its return B) the absolute value of any change in the asset's price C) the standard deviation of its return D) risk is impossible to measure

C

10) When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise

C

11) During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant. A) increases; left B) increases; right C) decreases; left D) decreases; right

C

17) You would be less willing to purchase bonds, other things equal, if ________. A) you inherit $1 million from your Uncle Harry B) you expect interest rates to fall C) gold becomes more liquid D) stock prices are expected to fall

C

2) When the price of a bond decreases, all else equal, the bond demand curve ________. A) shifts right B) shifts left C) does not shift D) inverts

C

4) When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise

C

5) Keynes assumed that money has ________ rate of return. A) a positive B) a negative C) a zero D) an increasing

C

7) The opportunity cost of holding money is ________. A) the level of income B) the price level C) the interest rate D) the discount rate

C

8) 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 ________. A) above; demand B) above; supply C) below; demand D) below; supply

C

1) The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher. A) higher; demand B) higher; quantity demanded C) lower; demand D) lower; quantity demanded

D

10) Everything else held constant, if the expected return on government 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 government bonds and the demand for corporate bonds ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

D

10) 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 ________. A) right; rises B) right; falls C) left; falls D) left; rises

D

12) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

D

4) Discovery of new gold in Alaska will ________ the ________ of gold, ________ its price, everything else held constant. A) increase; demand; increasing B) decrease; demand; decreasing C) decrease; supply; increasing D) increase; supply; decreasing

D

4) Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________. A) increase; right B) increase; left C) decrease; right D) decrease; left

D

5) Everything else held constant, if the expected return on ABC stock 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 ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

D

3) 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. A) falls; right B) falls; left C) rises; right D) rises; left

C

3) Everything else held constant, a decrease in wealth ________. A) increases the demand for stocks B) increases the demand for bonds C) reduces the demand for silver D) increases the demand for gold

C

13) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for gold will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

D

5) The riskiness of an asset that is unique to the particular asset is ________. A) systematic risk B) portfolio risk C) investment risk D) nonsystematic risk

D

1) When stock prices become more volatile, the ________ curve for gold shifts right and gold prices ________, everything else held constant. A) demand; increase B) demand; decrease C) supply; increase D) supply; decrease

A

16) The demand for silver decreases, other things equal, when ________. A) the gold market is expected to boom B) the market for silver becomes more liquid C) wealth grows rapidly D) interest rates are expected to rise

A

19) Holding all other factors constant, the quantity demanded of an asset is ________. A) positively related to wealth B) negatively related to its expected return relative to alternative assets C) positively related to the risk of its returns relative to alternative assets D) negatively related to its liquidity relative to alternative assets

A

2) A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

A

2) A return to the gold standard, that is, using gold for money will ________ the ________ for gold, ________ its price, everything else held constant. A) increase; demand; increasing B) decrease; demand; decreasing C) increase; supply; increasing D) decrease; supply; increasing

A

2) Holding many risky assets and thus reducing the overall risk an investor faces is called ________. A) diversification B) foolishness C) risk acceptance D) capitalization

A

2) Of the four factors that influence asset demand, which factor will cause the demand for all assets to increases, everything else held constant? A) Wealth B) Expected returns C) Risk D) Liquidity

A

4) 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. A) increases B) decreases C) has no effect on D) erases

A

5) An increase in the expected inflation rate will ________ the ________ for gold, ________ its price, everything else held constant. A) increase; demand; increasing B) decrease; demand; decreasing C) increase; supply; increasing D) decrease; supply; increasing

A

9) 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 ________. A) rise; right B) rise; left C) fall; right D) fall; left

A

3) In Keynes's liquidity preference framework, if there is excess demand for money, there is ________. A) excess demand for bonds B) equilibrium in the bond market C) excess supply of bonds D) too much money

C

3) In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________. A) price; deposit B) interest rate; deposit C) price; interest rate D) interest rate; premium

C

8) Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

D

8) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

D

9) Interest rates increased continuously during the 1970s. The most likely explanation is ________. A) banking failures that reduced the money supply B) a rise in the level of income C) the repeated bouts of recession and expansion D) increasing expected rates of inflation

D

14) If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

B

15) When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

B

16) When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant. A) supply; right B) supply; left C) demand; right D) demand; left

B

22) A decrease in the brokerage commissions in the housing market from 6 percent to 5 percent of the sales price will shift the ________ curve for bonds to the ________, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left

B

7) When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________. A) above; demand; rise B) above; demand; fall C) below; supply; fall D) above; supply; rise

B

8) In contrast to the CAPM, the APT assumes that there can be several sources of ________ that cannot be eliminated through diversification. A) nonsystematic risk B) systematic risk C) credit risk D) arbitrary risk

B

9) 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 ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

C

9) If there is an excess supply of money ________. A) individuals sell bonds, causing the interest rate to rise B) individuals sell bonds, causing the interest rate to fall C) individuals buy bonds, causing interest rates to fall D) individuals buy bonds, causing interest rates to rise

C

23) In the 1990s Japan had the lowest interest rates in the world due to a combination of ________. A) inflation and recession B) deflation and expansion C) inflation and expansion D) deflation and recession

D

2) The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. A) falls; supply B) falls; quantity supplied C) rises; supply D) rises; quantity supplied

D

6) A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

D

7) 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 ________. A) rise; right B) rise; left C) fall; right D) fall; left

D

8) An increase in the interest rate ________. A) increases the demand for money B) increases the quantity of money demanded C) decreases the demand for money D) decreases the quantity of money demanded

D