FI&M Chapter 4

47) Factors that can cause the supply curve for bonds to shift to the right include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) a decrease in government deficits. D) all of the above. E) only A and B of the above.

A an expansion in overall economic activity

69) In Figure 4.3, the decrease in the interest rate from i1 to i2 can be explained by A) a decrease in money growth. B) an increase in money growth. C) a decline in the expected price level. D) only A and B of the above.

B an increase in money growth

65) A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________. A) decrease; right B) decrease; left C) increase; right D) increase; left

B decrease; left

63) A rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________. A) decrease; right B) decrease; left C) increase; right D) increase; left

C increase; right

28) When the expected inflation rate decreases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

C increases; decreases; falls

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

C decreases; left

81) _______ is the total resources owned by an individual, including all assets. A) Expected return B) Wealth C) Liquidity D) Risk

B wealth

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

B demand; fall

64) A decline in the price level causes the demand for money to ________ and the demand curve to shift to the ________. A) decrease; right B) decrease; left C) increase; right D) increase; left

B decrease; left

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

B decreases; decreases; falls

16) The demand for an asset rises if ________ falls. A) risk relative to other assets B) expected return relative to other assets C) liquidity relative to other assets D) wealth

A risk relative to other assets

72) When the growth rate of the money supply increases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect.

A the liquidity effect is larger than the other effects

37) During an economic expansion, the supply of bonds ________ and the supply curve shifts to the ________. A) increases; left B) increases; right C) decreases; left D) decreases; right

B increases; right

67) Holding everything else constant, a decrease in the money supply causes A) interest rates to decline initially. B) interest rates to increase initially. C) bond prices to increase initially. D) both A and C of the above. E) both B and C of the above.

B interest rates to increase initially

74) When the growth rate of the money supply is decreased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A) larger; rapid B) larger; slow C) smaller; slow D) smaller; rapid

B larger; slow

31) When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

B right; falls

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

C below' supply; rise

87) As expected inflation falls for the coming year, we expected the price of gold to ________ due to a leftward shift the in ________ curve. A) increase; demand B) increase; supply C) decrease; demand D) decrease; supply

C decrease; demand

21) Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________. A) increase; left B) increase; right C) decrease; left D) decrease; right

C decreases; left

77) If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if A) there is fast adjustment of expected inflation. B) there is slow adjustment of expected inflation. C) the liquidity effect is smaller than the expected inflation effect. D) the liquidity effect is larger than the other effects.

D the liquidity effect is larger than the other effects

70) In Figure 4.3, an increase in the interest rate from i2 to i1 can be explained by A) a decrease in money growth. B) an increase in money growth. C) a decline in the price level. D) an increase in the expected price level.

A a decrease in money growth

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

A above; demand; fall

48) Factors that can cause the supply curve for bonds to shift to the left include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) an increase in government deficits. D) only A and C of the above.

B a decrease in expected inflation

46) In Figure 4.4, the most likely cause of a decrease in the equilibrium interest rate from i2 to i1 is A) an increase in the expected inflation rate. B) a decrease in the expected inflation rate. C) a business cycle expansion. D) a combination of both A and C of the above.

B a decrease in the expected inflation rate

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

B above; fall

59) The loanable funds 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) the supply of money; bonds

B expected inflation; money

50) An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise

B fall; rise

19) In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left

B falls; left

79) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the liquidity effect is ________ than the expected inflation effect and interest rates adjust ________ to changes in expected inflation. A) smaller; quickly B) larger; quickly C) larger; slowly D) smaller; slowly

C larger; slowly

35) Factors that cause the demand curve for bonds to shift to the left include A) an increase in the inflation rate. B) an increase in the liquidity of stocks. C) a decrease in the volatility of stock prices. D) all of the above. E) none of the above.

D all of the above

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

D below; rise

11) When the demand for bonds ________ or the supply of bonds ________, interest rates rise. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

D decreases; increases

14) When the demand for bonds ________ or the supply of bonds ________, bond prices fall. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

D decreases; increases

56) In Figure 4.2, one possible explanation for a decrease in the interest rate from i2 to i1 is A) an increase in government budget deficits. B) an increase in expected inflation. C) a decrease in economic growth. D) a decrease in the riskiness of bonds relative to other investments.

C a decrease in economic growth

83) When the quantity of bonds demanded equals the quantity of bonds supplied, there is A) excess supply. B) excess demand. C) a market equilibrium. D) an asset market approach.

C a market equlibrium

68) In Figure 4.3, the factor responsible for the decline in the interest rate is A) a decline in the price level. B) a decline in income. C) an increase in the money supply. D) a decline in the expected inflation rate.

C an increase in the money supply

60) When comparing the loanable funds and liquidity preference frameworks of interest rate determination, which of the following is true? A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation. B) The loanable funds framework provides a simpler analysis of the effects of changes in income, the price level, and the supply of money. C) In most instances, the two approaches to interest rate determination yield the same predictions. D) All of the above are true. E) Only A and B of the above are true.

C in most instances, the two approaches to interest rate determination yield the same predictions

54) In Figure 4.2, one possible explanation for the increase in the interest rate from i1 to i2 is a(n) ________ in ________. A) increase; the expected inflation rate B) decrease; the expected inflation rate C) increase; economic growth D) decrease; economic growth

C increase; economic growth

71) If the liquidity effect is smaller than the other effects, and the adjustment of expected inflation is slow, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth.

C interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth

57) 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 money and bonds

55) In Figure 4.2, one possible explanation for the increase in the interest rate from i1 to i2 is A) an increase in economic growth. B) an increase in government budget deficits. C) a decrease in government budget deficits. D) a decrease in economic growth. E) a decrease in the riskiness of bonds relative to other investments.

A an increase in economic growth

62) A lower level of income causes the demand for money to ________ and the interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

A decrease; decrease

49) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________. A) rise; increases B) rise; stabilizes C) rise; decreases D) fall; increases E) fall; stabilizes

A rise; increases

22) Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________ A) increase; left. B) increase; right. C) decrease; left. D) decrease; right.

B increase; right

39) An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________. A) increase; left B) increase; right C) decrease; left D) decrease; right

B increase; right

12) When the demand for bonds ________ or the supply of bonds ________, interest rates fall. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

B increases; decreases

30) When bond prices become less volatile, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; falls D) decreases; rises

B increases; falls

25) 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. A) reduce; financial; demand B) reduce; real; demand C) raise; financial; supply D) raise; real; supply

B reduce; real; demand

33) When bonds become more widely traded, and as a consequence the market becomes more 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

B right; falls

82) A ________ prefers stock in a less risky asset than in a riskier asset. A) risk preferrer B) risk-averse person C) risk lover D) risk-favorable person

B risk-averse person

44) In Figure 4.4, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is A) an increase in the price of bonds. B) a business cycle boom. C) an increase in the expected inflation rate. D) a decrease in the expected inflation rate.

C an increase in the expected inflation rate

36) Factors that cause the demand curve for bonds to shift to the left include A) a decrease in the inflation rate. B) an increase in the volatility of stock prices. C) an increase in the liquidity of stocks. D) all of the above. E) only A and B of the above.

C an increase in the liquidity of stocks

84) Determining asset prices using stocks of assets rather than flow is called A) asset transformation. B) expected return. C) asset market approach. D) market equilibrium.

C asset market approach

18) Diversification benefits an investor by A) increasing wealth. B) increasing expected return. C) reducing risk. D) increasing liquidity.

C reducing risk

51) A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise

C rise; fall

78) Milton Friedman contends that it is entirely possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation. A) fall; liquidity B) fall; risk C) rise; liquidity D) rise; risk

C rise; liquidity

15) Factors that determine the demand for an asset include changes in the A) wealth of investors. B) liquidity of bonds relative to alternative assets. C) expected returns on bonds relative to alternative assets. D) risk of bonds relative to alternative assets. E) all of the above.

E all of the above

29) When bond prices become more volatile, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; falls D) decreases; rises

D decreases; rises

61) A higher level of income causes the demand for money to ________ and the interest rate to ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

D increase; increase

24) When people begin to expect a large run up in stock prices, 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 left; rises

32) 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 left; rises

42) When the inflation rate is expected to increase, the expected return on bonds relative to real assets falls for any given interest rate; as a result, the ________ bonds falls and the ________ curve shifts to the left. A) demand for; demand B) demand for; supply C) supply of; demand D) supply of; supply

A demand for; demand

4) When the price of a bond is below the equilibrium price, there is excess ________ in the bond market and the price will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

A demand; rise

85) What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called? A) Econometric model B) Liquidity preference framework C) Market equilibrium D) Fisher effect

A econometric model

1) As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises. A) falls; rises B) falls; falls C) rises; rises D) rises; falls

A falls; rises

17) The higher the standard deviation of returns on an asset, the ________ the asset's ________. A) greater; risk B) smaller; risk C) greater; expected return D) smaller; expected return

A greater; risk

86) As expected inflation increases for the coming year, we expected the price of gold to ________ due to a rightward shift the in ________ curve. A) increase; demand B) increase; supply C) decrease; demand D) decrease; supply

A increase; demand

45) In Figure 4.4, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is a(n) ________ in the ________. A) increase; expected inflation rate B) decrease; expected inflation rate C) increase; government budget deficit D) decrease; government budget deficit

A increase; expected inflation rate

53) When the economy enters into a boom, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; rises D) decreases; increases; rises

A increases; increases; rises

66) Holding everything else constant, an increase in the money supply causes A) interest rates to decline initially. B) interest rates to increase initially. C) bond prices to decline initially. D) both A and C of the above. E) both B and C of the above.

A interest rates to decline initially

23) When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; falls B) right; rises C) left; falls D) left; rises

A right; falls

58) In his liquidity preference framework, Keynes assumed that money has a zero rate of return; thus, when interest rates ________ the expected return on money falls relative to the expected return on bonds, causing the demand for money to ________. A) rise; fall B) rise; rise C) fall; fall D) fall; rise

A rise; fall

20) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________. A) falls; right B) falls; left C) rises; right D) rises; left

C rises; right

3) When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise

C supply; fall

41) When the federal government's budget deficit decreases, the ________ curve for bonds shifts to the ________. A) demand; right B) demand; left C) supply; left D) supply; right

C supply; left

76) If the Fed wants to permanently lower interest rates, then it should lower the rate of money growth if A) there is fast adjustment of expected inflation. B) there is slow adjustment of expected inflation. C) the liquidity effect is smaller than the expected inflation effect. D) the liquidity effect is larger than the other effects.

C the liquidity effect is smaller than the expected inflation effect

34) 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 left; rises

26) A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets. A) reduce; financial B) reduce; real C) raise; financial D) raise; real

D raise; real

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 rises; quantity supplied

75) When the growth rate of the money supply is increased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation. A) larger; rapid B) larger; slow C) smaller; slow D) smaller; rapid

D smaller; rapid

43) 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. A) demand for; demand B) demand for; supply C) supply of; demand D) supply of; supply

D supply of; supply

40) When the federal governments budget deficit increases, the ________ curve for bonds shifts to the ________. A) demand; right B) demand; left C) supply; left D) supply; right

D supply; right

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

D supply; rise

80) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

A fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation

13) When the demand for bonds ________ or the supply of bonds ________, bond prices rise. A) increases; decreases B) decreases; increases C) decreases; decreases D) increases; increases

A increases; decreases

27) When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

D decreases; increases; rises

73) When the growth rate of the money supply decreases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect.

D the expected inflation effect is larger than the liquidity effect