TEST MONDAY

If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________.

decreases; decreases; increases

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

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

Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.

decreases; left

Everything else held constant, a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds.

decreasing; increasing

In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.

demand for; rise

In the market for money, when the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant.

demand; decreases; fall

If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.

demand; left; rises

A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a

discount bond

For simple​ loans, the simple interest rate is​ ________ the yield to maturity.

equal to

In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is

expectations of more profitable investment opportunities.

Everything else held constant, if the expected return on Disney stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ________ relative to Disney stock and the demand for CBS stock ________.

falls; falls

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

Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.

falls; rises

A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a

fixed−payment loan.

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.

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

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

According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that short-term interest rates are expected to

rise in the future.

Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________.

rises; right

In the market for money, when real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.

rises; right; rises

In the market for money, when the price level ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.

rises; right; rises

In the figure above, the decrease in the interest rate from i 1 to i 2 can be explained by

an increase in money growth.

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

an increase in the money supply.

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.

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.

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.

If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be

5 percent.

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

Although reserve requirements and the discount rate are not actually set by the ________, decisions concerning these policy tools are effectively made there.

Federal Open Market Committee

In which of the following situations would you prefer to be the​ lender?

The interest rate is 4 percent and the expected inflation rate is 1 percent.

If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

a decline in short-term interest rates in the near future and a rise further out in the future.

If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

a decline in short-term interest rates in the near future and an even steeper decline further out in the future.

In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is

a decrease in the expected return on bonds relative to other assets.

In Keynes's liquidity preference framework

an excess supply of bonds implies an excess demand for money.

In Keynes's liquidity preference framework, if there is excess demand for money, there is

an excess supply of bonds.

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

an increase in income.

If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting

constant short-term interest rates in the near future and further out in the future.

During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults, we would expect the risk premium for ________ bonds to be very high.

corporate Baa

A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a

coupon bond.

A​ ________ pays the owner a fixed coupon payment every year until the maturity​ date, when the​ ________ value is repaid.

coupon​ bond; face

According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to

decline moderately in the future.

If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for antiques will ________.

decrease; decrease

In the market for money, a lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant.

decrease; decrease

A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant.

decrease; increase

If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.

decrease; increase

In the market for money, a decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.

decrease; left

An increase in the time to the promised future payment​ ________ the present value of the payment.

decreases

An increase in the interest rate

decreases the quantity of money demanded.

Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when

income tax rates are lowered.

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, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.

increase; decrease

In the market for money, a rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant.

increase; increase

In the market for money, business cycle expansions increase income, causing money demand to ________ and interest rates to ________, everything else held constant.

increase; increase

If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant.

increase; more

In the history of the United States, interest rates usually rise during expansions. This is because during expansions, usually bond suppliers ________ their supply of bonds ________ than bond demanders ________ their demand for bonds..

increase; more; increase

Holding everything else constant in the market for money, as the interest rate rises, the opportunity cost of holding money ________ thus making money less desirable. So the quantity of money demanded falls.

increases

Holding everything else equal, if the expected return on My Company stock increases from 10% to 15% and the expected return on That Company stock increases from 10% to 12%, the demand for My Company stock

increases because the expected return has increased relative to the alternative asset.

An equal decrease in all bond interest rates

increases the price of a ten-year bond more than the price of a five-year bond.

A decrease in default risk on corporate bonds ________ the demand for these bonds, and ________ the demand for default-free bonds, everything else held constant.

increases; lowers

In the market for money, when the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.

increases; right; falls

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

increasing expected rates of inflation.

If there is an excess supply of money

individuals buy bonds, causing interest rates to fall.

If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the

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

If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the

interest rate will rise immediately above the initial level when the money supply grows.

According to the segmented markets theory of the term structure

interest rates on bonds of different maturities do not move together over time.

Interest-rate risk is the riskiness of an​ asset's returns due to

interest-rate changes.

Everything else held constant, 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 ________.

left; rises

In the market for money, when the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.

left; rises

In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the

liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.

A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve.

liquidity premium theory

An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant.

lowers; increases

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

money and bonds.

Each governor on the Board of Governors can serve

one full nonrenewable fourteen-year term plus part of another term.

A discount bond

pays the bondholder the face value at maturity.

Another name for a consol is a​ ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever.

perpetuity

An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant.

reduce; increase

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

Everything else held constant, a decrease in wealth

reduces the demand for silver.

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________.

rises; rises

If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________.

sell; rise

A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a

simple loan

Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors.

six; three

In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant.

stay where it is

A ________ yield curve predicts a future increase in inflation.

steeply upward sloping

Goal independence is the ability of ________ to set monetary policy ________.

the central bank; goals

Instrument independence is the ability of ________ to set monetary policy ________.

the central bank; instruments

Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then

the interest rate on municipal bonds would exceed the rate on Treasury bonds.

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.

Differences in ________ explain why interest rates on Treasury securities are not all the same.

time to maturity

In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus

when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

An inverted yield curve predicts that short-term interest rates

will fall in the future.

Last year you purchased a bond with an interest rate of​ 5%. Now the interest rates in the bond markets drop. Then

you can sell your bond at​ today's market for a higher price.

Keynes assumed that money has ________ rate of return.

zero

A​ two-year bond with​ $1,000 face value and​ 10% coupon rate is sold for​ $1,000 today. If one year later the market interest rate decreases to​ 5%, then this bond will have a market price of​ _______ next year.

​$1,047.62

A​ three-year bond with​ $1,000 face value and​ 10% coupon rate is sold for​ $1,000 today​ (2011). If one year later​ (2012) the market interest rate decreases to​ 5%, then this bond will have a market price of​ _______ (round to the nearest​ integer) next year​ (2012).

​$1,092.97

If a​ $5,000 coupon bond has a coupon rate of 13​ percent, then the coupon payment every year is

​$650.

A discount bond is also called a​ ________ because the owner does not receive periodic payments.

​zero-coupon bond