Chapter 5

What is the interest rate on a one-year discount bond that pays $1,000 at maturity, is held for the entire year, and the purchase price is $955

4.7%

An increase to the riskiness of stocks cause... a) bond demand to shift right b) bond demand to shift left c) bond supply to shift right d) bond supply to shift left

a) bond demand to shift right

A business cycle expansion causes... a) both bond demand and bond supply to shift right b) both bond demand and bond supply to shift left c) bond demand to shift right and bond demand to shift left d) bond demand to shift left and bond demand to shift right

a) both bond demand and bond supply to shift right

Along the supply curve for bonds, an increase in the price of bonds... a) decrease the interest rate and increase the quantity of bonds supplied. b) decrease the interest rate and decrease the quantity of bonds supplied. c) increase the interest rate and increase the quantity of bonds supplied. d) increase the interest rate and decrease the quantity of bonds supplied.

a) decrease the interest rate and increase the quantity of bonds supplied.

An increase in the price level causes a) money demand to shift to the right, and interest rates increase b) money demand to shift to the left, and interest rates decrease c) money supply to shift to the right, and interest rates decrease d) money supply to shift to the left, and interest rates decrease

a) money demand to shift to the right, and interest rates increase

Which of the following would cause the demand for long-term bonds to shift right? a) Stocks became less risky b) People expect interest rates to fall in the future c) Brokerage firms reduce their commissions on stock transactions d) People increase their expectation of inflation

b) People expect interest rates to fall in the future

A decrease in wealth in the economy causes... a) bond demand to shift right, the price of bonds to rise, and interest rates to fall. b) bond demand to shift left, the price of bonds to fall, and interest rates to rise. c) bond supply to shift right, the price of bonds to fall, and interest rates to rise. d) bond supply to shift left, the price of bonds to rise, and interest rates to fall.

b) bond demand to shift left, the price of bonds to fall, and interest rates to rise.

If the demand of bonds shift to the left, the price of bonds... a) decrease, and interest rates fall. b) decrease, and interest rates rise. c) increase and interest rates rise. d) increase, and interest rates fall.

b) decrease, and interest rates rise.

Supposed there is an increase in the growth rate of the money supply. If the liquidity effect is smaller than the output, price level, and expected inflation effects, then in the long run, interest rates... a) remain unchanges when compared to their initial value b) rise when compared to their initial value c) fall copmpared to their initial value d) become unpredictable

b) rise when compared to their initial value

Which of the following effects from an increase in the money supply causes interest rates to decrease in the short run? a) the income effect b) the liquidity effect c) the expected inflation effect d) the price-level effect

b) the liquidity effect

When an increase in expected inflation causes interest rates to rise, this is known as the a) liquidity effect b) output effect c) Fisher effect d) deficit effect

c) Fisher effect

In the theory of portfolio choice, which of the following will decrease the quantity demanded of an asset? a) an increase in the wealth of the buyer b) an increase in the expected return on the asset relative to alternative assets c) an increase in the risk of the asset relative to the alternative assets d) an increase in the liquidity of the asset relative to alternative assets

c) an increase in the risk of the asset relative to the alternative assets

An increase in expected inflation causes... a) bond demand to shift left, bond supply to shift right, and interest rates to fall. b) bond demand to shift right, bond supply to shift left, and interest rates to rise. c) bond demand to shift left, bond supply to shift right, and interest rates to rise. d) bond demand to shift left, bond supply to shift left, and interest rates to fall.

c) bond demand to shift left, bond supply to shift right, and interest rates to rise.

In the long run, if the output, price-level, and expected inflation effects outweigh the liquidity effect, to reduce interest rates, the Federal Reserve should a) maintain the growth rate of the money supply b) increase the growth rate of the money supply c) decrease the growth rate of the money supply d) do none of the above

c) decrease the growth rate of the money supply

Supposed there is an increase in the growth rate of the money supply. If the liquidity effect is smaller than the income, price level, and expected inflation effects, and if inflationary expectations adjust slowly, then in the short run, interest rates... a) remain unchanged b) rise c) fall d) become unpredictable

c) fall

The price of bonds and interest rates are... a) uncorrelated b) positively correlated c) negatively correlated d) either positively or negatively correlated, depending on the market.

c) negatively correlated

Which of the following will cause interest rates to rise? a) The stock market has become more volatile b) Firms become pessimistic about the future profitability of new plant and equipment c) People reduce their expectation of inflation d) The government increases its budget deficit

d) The government increases its budget deficit

Which of the following statements about the bond market are true? a) Bond demand correspond to willingness to lend. b) Bond supply correspond to willingness to borrow. c) The supply and demand of bonds are measured in terms of "stocks" of assets. d) all of the above

d) all of the above

If the price is below the equilibrium price, there is an excess... a) supply of bonds, the price of bonds will fall, and the interest rate will rise. b) supply of bonds, the price of bonds will rise, and the interest rate will fall. c) demand of bonds, the price of bonds will fall, and the interest rate will rise. d) demand of bonds, the price of bonds will rise, and the interest rate will fall.

d) demand of bonds, the price of bonds will rise, and the interest rate will fall.

In the liquidity preference framework, interest rates are determined by the supply and demand for... a) bonds b) stocks c) output d) money

d) money