Chapter 5 HW money and banking

What effect will a sudden increase in the volatility of gold prices have on interest​ rates? A. Interest rates will increase because bonds will become relatively more​ risky, which decreases the demand for bonds B. Interest rates will increase because bonds will become relatively less​ risky, which increases the demand for bonds C. Interest rates will decrease because bonds will become relatively less​ risky, which increases the demand for bonds D. Interest rates will decrease because bonds will become relatively more​ risky, which decreases the demand for bonds

C

Based on empirical​ evidence, because interest rates _______________ when the economy is​ expanding, interest rates are said to be ___________________.

Increase, procyclical

If interest rates​ rise, this opportunity cost will ___________, and individuals will hold _____________ cash balances.

Increase, smaller

The figure to the right depicts the bond market. Suppose there is a downward revision of inflation expectations. Show the effect on the bond market. 1. Using the line drawing tool​, show the effect on bond demand. Properly label your line. 2. Using the line drawing tool​, show the effect on bond supply. Properly label your line. 3. Using the point drawing tool​, indicate the new equilibrium bond price and quantity. Label the point​ '2'. Carefully follow the instructions​ above, and only draw the required objects.

Supply curve shifts to the left Demand curve shifts to the right Equilibrium (prices) rise

Will there be an effect on interest rates if brokerage commissions on stocks fall? Explain your answer.

Yes, interest rates will rise. The lower commission on stocks makes them more liquid than bonds, and the demand for bonds will fall. The demand curve B-d will therefore shift to the left, and the equilibrium bond price falls and the interest rate will rise.

Would you be more or less willing to buy a share of microsoft stock in the following situations: 1. Your wealth falls: 2. You expect the stock to appreciate in value: 3. The bond market becomes more liquid: 4. You expect gold to appreciate in value 5. Prices in the bond market become more volatile

1. Less willing 2. More willing 3. Less willing 4. Less willing 5. More willing

What is the opportunity cost of holding ​$1,500 in cash if the relevant interest rate is 8 ​percent?

1500 * .08 = 120

If the next chair of the Federal Reserve Board has a reputation for advocating an even slower rate of money growth than the current​ chair, what will happen to interest​ rates? A. Slower money growth will lead to a liquidity​ effect, which will raise interest​ rates; however, the lower​ income, price​ level, and inflation will tend to lower interest rates. B. Slower money growth will lead to a liquidity​ effect, which will lower interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the decrease in interest rates. C. Slower money growth will lead to a liquidity​ effect, which will lower interest​ rates; however, the lower​ income, price​ level, and inflation will tend to raise interest rates. D. Slower money growth will lead to a liquidity​ effect, which will raise interest rates.​ Moreover, the lower​ income, price​ level, and inflation will reinforce the increase in interest rates.

A

​"No one who is​ risk-averse will ever buy a security that has a lower expected​ return, more​ risk, and less liquidity than another​ security." Is this statement​ true, false, or​ uncertain? A. False because by diversifying or hedging your​ portfolio, it is possible to avoid risks and increase your expected return. B. True because for a​ risk-averse person, those characteristics make a security less desirable. C. Uncertain because there may be other crucial characteristics to consider when purchasing a security.

B

What will happen to interest rates if the public suddenly expects a large increase in stock​ prices? A. Interest rates will rise because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases B. Interest rates will fall because the expected increase in stock prices raises the liquidity of stocks relative to bonds and so the demand for bonds decreases C. Interest rates will rise because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases D. Interest rates will fall because the expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds decreases

C

Using the liquidity preference​ framework, when the economy​ expands: A. the demand for money will​ increase, shifting the money demand curve to the left B. the demand for money will​ decrease, shifting the money demand curve to the right C. the demand for money will​ decrease, shifting the money demand curve to the left D. the demand for money will​ increase, shifting the money demand curve to the right

D

Will there be an effect on interest rates if brokerage commissions on stocks​ fall? A. ​Yes, interest rates would rise because people would want to hold more stocks and fewer​ bonds, which would increase the demand for bonds B. ​Yes, interest rates would fall because stocks would have a relatively higher rate of return than​ bonds, which would reduce the demand for bonds C. ​No, interest rates would remain the same because the brokerage commissions would only affect the stock market D. ​Yes, interest rates would rise because stocks become more liquid than​ before, which would reduce the demand for bonds

D