International Finance 4

Higher expected interest rates in the future _____ the demand for long-term bonds and shift the demand curve to the _____.

decrease; left

When the expected inflation rate increases, the demand for bonds ______, the supply of bonds ________, and the interest rate _____.

decreases; increases; rises.

When bond prices become more volatile, the demand for bonds _______ and the interest rate ______.

decreases; rises.

When the interest rate on a bond is above the equilibrium interest rate, there is excess _____ in the bond market and the interest rate will _____.

demand; fall

In a recession when income and wealth are falling, the demand for bonds _____ and the demand curve shifts to the _____.

falls; left

The higher the standard deviation of returns on an asset, the ____ the asset's ______.

greater; risk

In Figure 4.4, the most likely cause of the increase in the equilibrium interest rate from from i1 to i2 is a(n) ______ in the ______.

increase; expected inflation rate.

Lower expected interest rates in the future _____ the demand for long-term bonds and shift the demand curve to the ______.

increase; right

When the demand for bonds _______ or the supply of bonds ______, bond prices fall.

increases; decrease.

When the demand for bonds ______ or the supply of bonds _______, bond prices rise.

increases; decreases.

When the expected inflation rate decreases, the demand for bonds ______, the supply of bonds _____, and the interest rate _______.

increases; decreases; falls.

When bond prices become less volatile, the demand for bonds _____ and the interest rate _____.

increases; falls

When people begin to expect a large run up in stock prices, the demand curve for bonds shifts to the ______ and the interest rate _____.

left; rises

A decrease in the expected rate of inflation will _____ the expected return on bonds relative to that on _____ assets.

raise; real

An increase in the expected rate of inflation will _____ the expected return on bonds relative to that on ____ assets, and shift the _______ curve to the left.

reduce; real; demand

Factors that determine the demand for an asset include changes in the

wealth of investors; liquidity of bonds relative to alternative assets; expected returns on bonds relative to alternative assets; risk of bonds relative to alternative assets.

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

below; rise.

When the price of a bond is ______ the equilibrium price, there is an excess supply of bonds and the price will _____.

above; fall.

In figure 4.4, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is

an increase in the expected inflation rate.

Factors that cause the demand curve for bonds to shift to the left include

an increase in the inflation rate; an increase in the liquidity of stocks; a decrease in the volatility of stock prices.

When stock prices become less volatile, the demand curve for bonds shits to the ______ and the interest rate _____.

left; rises.

When the inflation rate is expected to increase, the expected return on bonds relative to the real assets falls for any given interest rate; as a result, the _____ bonds falls and the _____ curve shifts to the left.

demand for; demand

When interest rate decrease, the demand curve for bonds shifts to the left.

False

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

False

An increase in an asset's expected return relative to that of an alternative asset, holding everything else unchanged, raises the quantity demanded of the asset.

True

An increase in the federal government budget deficit twill raise the interest rate on bonds.

True

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

False

The supply curve for bonds has the usual upward slope, indicating that as the price ______, ceteris paribus, the ______ increases.

rises; quantity supplied.

During business cycle expansions when income and wealth are rising, the demand for bonds ____ and the demand curve shifts to the _____.

rises; right.

The demand for an asset rises if _____ falls.

risk relative to other assets.

When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ______ bonds increases and the ____ curve shifts to the right.

supply of; supply

When the price of a bond is above the equilibrium price, there is excess _____ in the bond market and the price will ______.

supply; fall

When the federal government's budget deficit decreases, the _____ curve for bonds shifts to the _____ .

supply; left

When the federal governments budget deficit increases, the _____ curve for bonds shifts to the _____.

supply; right.

When the interest rate on a is below the equilibrium interest rate, there is excess ____ in the bond market and the interest rate will _____.

supply; rise

Investors make their choices of which assets to hold by comparing the expected return, liquidity, and risk of alternative assets.

True

When an economy grows out of a recession, normally the demand for bonds increases and the supply of bonds increases.

True

In Figure 4.4, the most likely cause of a decrease in the equilibrium interest rate from i2 to i1 is

a decrease in the expected inflation rate.

As the price of a bond _____ and the expected return ______, bonds become more attractive to investors and the quantity demanded rises.

falls; rises.