Money and Banking Chapter 5

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If the interest rates are expected to increase, the demand for bonds ___________ and the demand curve shifts ___________

decreases; elft

If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________

decreases; increases

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

When the inflation rate is expected to increase, the _________ for bonds falls, while the _________ curve shifts to the right, everything else held constant

demand; supply

The bond demand curve is __________ sloping, indicating a __________ relationship between the price and quantity demanded of bonds, everything else equal

downward; inverse

The bond demand curve is __________ sloping, indicating an ___________ relationship between the price and quantity demanded of bonds

downward; inverse

Keynes assumed that money has ________ rate of return

a zero

In Keyne's liquidity preference framework

an excess supply of bonds implied an excess demand for money

Factors that can cause the supply curve for bonds to shift to the right include

an expansion in overall economic activity

In the figure above, one factor not responsible for the decline in the demand for money is

an increase in income

The factor responsible for the decline in the interest rate is

an increase in the money supply

Pieces of property that serve as a store of value are called

assets

If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________

below; demand

A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio

beta

A movement along the bond demand for supply curve occurs when __________ changes

bond prices

An increases in the expected return on common stocks would ___________ the demand for bonds, shifting the demand curve to the __________

decrease; left

During a recession, the supply of bonds ___________ and the supply curve shifts in the ___________, everything else held constant

decrease; left

Everything else held constant, when households save less, wealth and the demand for bonds __________ and the bond demand curve shifts ___________.

decrease; left

An increase in the interest rate

decreases the quantity of money demanded

If the price of goal becomes less volatile, then other things equal, the demand for stocks will __________ and the demand for antiques will ____________

decreases; decreases

In the bond market, the bond demanders are the ____________ and the bond suppliers are the __________

lenders; borrowers

The ________ the returns on two securities move together, the __________ benefit there is from diversification

less; more

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the _________ effect

liquidity

Of the four effects on interest rates from an increase in the money supply, the initial effect is the

liquidity effect

Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the

liquidity effect

The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the

liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation

A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell __________ bonds than others want to buy, the price of bonds will ________

more; fall

The riskiness of an asset that is unique to the particular asset is

nonsystematic risk

The demand for Picasso paintings rises (holding everything else equal) when

people expect a boom in real estate prices

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; falls

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________

supply of; fall

When the government has a surplus, as occurred in the late 1990's, the ________ curve of bonds shifts to the _________

supply; left

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

Deflation causes the demand for bonds to ___________, the supply of bonds to _________, and bond prices to __________

increase; decrease; increase

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

increases

The interest rate falls when either the demand for bonds ___________ or the supply of bonds __________

increases; decreases

If there is an excess supply of money

individuals buy bonds, causing interest rates to fall

During a recession, the supply of bonds _________ and the supply curve shifts to the _________

decreases; left

The opportunity cost of holding money is

the interest rate

When the growth rate of the money supply increases, interest rates end up being permanently lower if

the liquidity effect is larger than the other effects

Would an increase in volatility of stock prices have any impact on the demand for rare coins?

yes, it would cause the demand for rare coins to increase

When households save less, wealth and the demand for bonds _________ and the bond demand curve shifts ___________

decreases; left

If prices in the diamond market becomes less volatile then the demand for diamonds _________ and the demand for gold _________-

increases; decreases

If wealth increases, the demand for stocks __________ and that of long-term bonds ___________, everything else held constant

increases; increases

Higher government deficits _________ the supply of bonds and shifts the supply curve to the __________

increases; right

Interest rates increased continuously during the 1970s. The most likely explanation is

increasing expected rates of inflation

When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant

decrease; decreases; falls

When the expected inflation rate increases, the real cost of borrowing _________ and bond supply __________, everything else held constant

decreases, increases

If the price of diamonds is expected to decrease, all else equal, then the demand for diamonds ________ and the demand for platinum ________

decreases; increases

When the price of a bond decreases, all else equal, the bond demand curve

does not shift

When the price level falls, the ________ curve for nominal money _________, and interest rates _________, everything else held constant

demand; decreases; fall

In the figure above, a factor that could cause the demand for bonds to shift to the right is

expectations of lower interest rates in the future

Everything else held constant, if the expected return on ABC stock rises form 5 to 10% and the expected return on CBA stock is unchanged , then the expected return of holding CBA stock ________ relative to ABC stock and the demand for CBA stock ________

falls; falls

If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________

increase; decrease

If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant

increase; decrease

If housing prices are expected to increase, than, everything else held constant, the demand for houses will ___________ and that of Treasury bills will _____________

increase; decrease

If stock prices are expected to drop dramatically, then everything else held constant, the demand for stocks will _________ and that of Treasury bills will ___________

decrease; increase

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

Everything else held constant, if the expected return on US Treasury bonds falls from 10 to 5% and the expected return on GE stock rises 8%, then the expected return of holding GE stock ___________ relative to the US Treasury bonds and the demand for GE stock _________-

rises; rises

When the price of a bond is above the equilibrium price, there is an excess _______ bonds and price will ________

supply of; fall

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

If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if

the liquidity effect is larger than the other effects

Holding everything else constant,

the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A

Factors that decrease the demand for bonds include

a decrease in the riskiness of stocks

The decrease in the interest rate from i1 to i2 can be explained by

a decline in the expected price level

Everything else held constant, if the expected return on RST stock declines form 12 to 9% and the expected return on XYZ stock declines from 8 to 7%, then the expected return of holding RST stock ____________ relative to eXY stock and demand for XYZ stock _________

falls; rises

You would be less willing to purchase US Treasury bonds, other things equal, if

gold becomes more liquid

The demand for houses decrease when

gold prices are expected to increase

The demand for gold increases when

interest rates are expected to rise

When the interest rate changes,

it is because either the demand or the supply curve has shifted

Holding all other factors constant, the quantity demanded of an asset is

positively related to weatlh

In the bond market, the market equilibrium shows the market-clearing _______ and the market-clearing ________

price; interest rate

An increase in the expected rate of inflation will _________ the expected return on bonds relative to the that on ___________ assets, everything else held constant

reduce; real

An increase in the expected rate of inflation will __________ the expected return on bonds relative to that on _________ assets, everything else held constant

reduce; real

Everything else held constant, a decrease in wealth

reduces the demand for silver

You would be more will to buy AT&T bonds if

the brokerage commissions on bond sales become cheaper

When prices in the art market become more uncertain

the demand curve for bonds shifts to the right and the interest rate falls

When real estate prices are expected to decrease

the demand curve for bonds shifts to the right and the interest rate falls

The riskiness of an asset is measured by

the standard deviation of its return

When the government has higher budget deficits

the supply curve for bonds shifts to the right and the interest rate rises

In the future above, the price of bonds would fall from p2 to p1 if

there is a business cycle expansion

The bond supply curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity supplied of bonds

upward; direct

In the 1990's Japan had the lowest interest rates in the world due to the combination of

deflation and recession

An increase the riskiness of bonds relative to alternative assets causes the demand for bonds to ___________ and the demand curve to shift to the _________

fall; left

The economist Irving Fisher explained why interest rates ________ as the expected rate of inflation ___________

rise; increases

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates __________ as the expected rate of inflation ________, everything else held constant

rise; increases

Everything else held constant, an increase in the liquidity of bonds results in a _________ in demand for bonds and the demand curve shifts to the ___________

rise; right

The demand for silver decreases, other things equal, when

the gold market is expected to boom

In the figure above, the factor responsible for the decline in the interest rate is

an increase in the money supply

The demand curve for bonds has the usual downward slope, indicating that the ___________ prices of the bond the ___________ is higher

lower; quantity demanded

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant

wealth

In the figure above, the decrease in the interest rate from i1 to i2 can be explained by

a decline in the expected price level

In the figure above, some factors responsible for the decline in the demand for money is

a decline the price else, a decline in income, a decline in the expected inflation rate

An increase an asset's expected return relative to that of an alternative asset, holding everything else constant, _________ the quantity demanded for the asset

increases

Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate _________

left; rises

When stock prices become less volatile, the demand curve for bonds shifts to the _________ and the interest rate _________

left; rises

In the bond market, the bond demanders are the _________ and the bond suppliers are the ___________

lenders; borrowers

In Keyne's liquidity preference framework, individuals are assumed to hold their wealth in two forms

money and bonds


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