Money Econ Test #2
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
