Chapter 5

B) decrease; left

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. A) decrease; right B) decrease; left C) increase; right D) increase; left

B) demand; left

A decrease in the brokerage commissions in the housing market from 6% to 5% of the sales price will shift the ________ curve for bonds to the ________, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left

A) decrease; decrease

A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

A) bond price

A movement along the bond demand or supply curve occurs when ________ changes. A) bond price B) income C) wealth D) expected return

D) increase; increase

A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

C) more; fall

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 ________. A) fewer; fall B) fewer; rise C) more; fall D) more; rise

A) increases

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. A) increases B) decreases C) has no effect on D) erases

B) increase; right

An increase in the expected inflation rate causes the supply of bonds to ________ and the supply curve to shift to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right

B) reduce; real

An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant. A) reduce; financial B) reduce; real C) raise; financial D) raise; real

D) decreases the quantity of money demanded.

An increase in the interest rate A) increases the demand for money. B) increases the quantity of money demanded. C) decreases the demand for money. D) decreases the quantity of money demanded.

B) increase; decrease; increase

Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant. A) increase; increase; increase B) increase; decrease; increase C) decrease; increase; increase D) decrease; decrease; increase

C) decreases; left

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

C) rises; right

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. A) falls; right B) falls; left C) rises; right D) rises; left

C) reduces the demand for silver.

Everything else held constant, a decrease in wealth A) increases the demand for stocks. B) increases the demand for bonds. C) reduces the demand for silver. D) increases the demand for gold.

B) bonds; real

Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets. A) bonds; financial B) bonds; real C) real estate; financial D) real estate; real

A) rise; right

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 ________. A) rise; right B) rise; left C) fall; right D) fall; left

D) fall; left

Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________. A) rise; right B) rise; left C) fall; right D) fall; left

B) right; right

Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion. A) right; left B) right; right C) left; left D) left; right

A) rises; right

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 ________. A) rises; right B) rises; left C) falls; right D) falls; left

C) falls; rises

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 ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

A) rises; rises

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 ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

D) falls; falls

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls

D) left; rises

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 ________. A) right; rises B) right; falls C) left; falls D) left; rises

D) decrease; left

Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________. A) increase; right B) increase; left C) decrease; right D) decrease; left

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

Everything else held constant, when prices in the art market become more uncertain A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the demand curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate falls.

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

Everything else held constant, when real estate prices are expected to decrease A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the demand curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate falls.

D) left; rises

Everything else held constant, 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) the supply curve for bonds shifts to the right and the interest rate rises.

Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the supply curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate rises.

D) rise; Fisher effect

Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________. A) fall; Keynes effect B) fall; Fisher effect C) rise; Keynes effect D) rise; Fisher effect

A) an expansion in overall economic activity.

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) a business cycle recession.

D) a decrease in the riskiness of stocks

Factors that decrease the demand for bonds include A) an increase in the volatility of stock prices. B) a decrease in the expected returns on stocks. C) a decrease in the inflation rate. D) a decrease in the riskiness of stocks

B) increase; right

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right

A) positively related to wealth.

Holding all other factors constant, the quantity demanded of an asset is A) positively related to wealth. B) negatively related to its expected return relative to alternative assets. C) positively related to the risk of its returns relative to alternative assets. D) negatively related to its liquidity relative to alternative assets.

A) diversification.

Holding many risky assets and thus reducing the overall risk an investor faces is called A) diversification. B) foolishness. C) risk acceptance. D) capitalization.

A) decrease; left

Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A) decrease; left B) decrease; right C) increase; left D) increase; right

B) increase; decrease

If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

D) 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. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease

B) increase; decrease

If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

B) demand; left

If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant. A) demand; right B) demand; left C) supply; left D) supply; right

A) left; rise

If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________. A) left; rise B) left; fall C) right; rise D) right; fall

A) increases; decreases

If prices in the diamond market become less volatile, all else equal, then the demand for diamonds ________ and the demand for gold ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases

B) increases; falls

If real estate prices are expected to drop, all else equal, the demand for bonds ________ and the interest rate_______. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls

A) demand; left; rises

If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________. A) demand; left; rises B) demand; right; rises C) demand; left; falls D) supply; left; rises

D) 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 ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

D) the liquidity effect is larger than the other effects.

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.

A) increases; decreases

If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases

D) supply; fall

If the interest rate on a bond is below the equilibrium interest rate, there is an excess ________ of bonds and the bond price will ________. A) demand; rise B) demand; fall C) supply; rise D) supply; fall

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

If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will fall immediately below the initial level when the money supply grows. D) interest rate will rise immediately above the initial level when the money supply grows.

C) 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 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) below; demand

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 ________. A) above; demand B) above; supply C) below; demand D) below; supply

A) decreases; increases

If the price of diamonds is expected to decrease, all else equal, then the demand for diamonds ________ and the demand for platinum ________. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases

C) decrease; decrease

If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for antiques will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

A) sell; rise

If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________. A) sell; rise B) sell; fall C) buy; rise D) buy; fall

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

In Keynes's liquidity preference framework A) the demand for bonds must equal the supply of money. B) the demand for money must equal the supply of bonds. C) an excess demand of bonds implies an excess demand for money. D) an excess supply of bonds implies an excess demand for money.

C) an excess supply of bonds.

In Keynes's liquidity preference framework, if there is excess demand for money, there is A) an excess demand for bonds. B) equilibrium in the bond market. C) an excess supply of bonds. D) too much money.

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

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

D) deflation and recession.

In the 1990s Japan had the lowest interest rates in the world due to a combination of A) inflation and recession. B) deflation and expansion. C) inflation and expansion. D) deflation and recession.

B) increase; right

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. A) increase; left B) increase; right C) decrease; left D) decrease; right

A) lenders; borrowers

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers

C) price; interest rate

In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________. A) price; deposit B) interest rate; deposit C) price; interest rate D) interest rate; premium

A) at the moment the price level hits its peak (stops rising) because both the price level and expected inflation effects are at work.

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 A) at the moment the price level hits its peak (stops rising) because both the price level and expected inflation effects are at work. B) immediately after the price level begins to rise, because both the price level and expected inflation effects are at work. C) at the moment the expected inflation rate hits its peak. D) at the moment the inflation rate hits it peak.

A) demand for; rise

In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise

D) increasing expected rates of inflation.

Interest rates increased continuously during the 1970s. The most likely explanation is A) banking failures that reduced the money supply. B) a rise in the level of income. C) the repeated bouts of recession and expansion. D) increasing expected rates of inflation.

C) rise; liquidity

It is 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) a zero

Keynes assumed that money has ________ rate of return. A) a positive B) a negative C) a zero D) an increasing

A) liquidity effect.

Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the A) liquidity effect. B) income effect. C) price level effect. D) expected inflation effect.

A) wealth

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? A) wealth B) expected returns C) risk D) liquidity

A) assets.

Pieces of property that serve as a store of value are called A) assets. B) units of account. C) liabilities. D) borrowings.

A) downward; inverse

The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity demanded of bonds, everything else equal. A) downward; inverse B) downward; direct C) upward; inverse D) upward; direct

B) expected inflation; money

The bond supply and demand 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) government budget deficits; money

B) interest rates are expected to rise.

The demand for gold increases, other things equal, when A) the market for silver becomes more liquid. B) interest rates are expected to rise. C) interest rates are expected to fall. D) real estate prices are expected to increase.

D) gold prices are expected to increase.

The demand for houses decreases, all else equal, when A) wealth increases. B) real estate prices are expected to increase. C) stock prices become more volatile. D) gold prices are expected to increase.

A) the gold market is expected to boom.

The demand for silver decreases, other things equal, when A) the gold market is expected to boom. B) the market for silver becomes more liquid. C) wealth grows rapidly. D) interest rates are expected to rise.

A) 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. A) rise; increases B) rise; stabilizes C) fall; stabilizes D) fall; increases

C) the interest rate.

The opportunity cost of holding money is A) the level of income. B) the price level. C) the interest rate. D) the discount rate.

B) fall, left

The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ________ and the demand curve to shift to the ________. A) fall; right B) fall, left C) rise; right D) rise; left

C) the standard deviation of its return.

The riskiness of an asset is measured by A) the magnitude of its return. B) the absolute value of any change in the asset's price. C) the standard deviation of its return. D) risk is impossible to measure.

D) rises; quantity supplied

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

A) increases; increases

When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

B) rises; right; rises

When real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; right; rises B) rises; right; rises C) falls; left; rises D) rises; left; rises

B) increases; right; falls

When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A) decreases; right; rises B) increases; right; falls C) decreases; left; falls D) increases; left; rises

D) left; rises

When the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A) right; rises B) right; falls C) left; falls D) left; rises

B) decreases; decreases; falls

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

D) decreases; increases; rises

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

C) decreases; increases

When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

B) supply; left

When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant. A) supply; right B) supply; left C) demand; right D) demand; left

A) the liquidity effect is larger than the other effects.

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.

B) larger; slow

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

D) it is because either the demand or the supply curve has shifted.

When the interest rate changes, A) the demand curve for bonds shifts to the right. B) the demand curve for bonds shifts to the left. C) the supply curve for bonds shifts to the right. D) it is because either the demand or the supply curve has shifted.

C) supply of; fall

When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise

B) above; demand; fall

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

B) demand; fall

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

D) rises; right; rises

When the price level ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; right; rises B) rises; right; falls C) falls; left; rises D) rises; right; rises

A) demand; decreases; fall

When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; decreases; fall B) demand; increases; rise C) supply; increases; rise D) supply; decreases; fall

D) below; rise

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

A) demand; right

When the prices of rare coins become volatile, the ________ curve for bonds shifts to the ________, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left

C) gold becomes more liquid.

You would be less willing to purchase U.S. Treasury bonds, other things equal, if A) you inherit $1 million from your Uncle Harry. B) you expect interest rates to fall. C) gold becomes more liquid. D) stock prices are expected to fall.

A) the brokerage commissions on bond sales become cheaper.

You would be more willing to buy AT&T bonds (holding everything else constant) if A) the brokerage commissions on bond sales become cheaper. B) interest rates are expected to rise. C) your wealth has decreased. D) you expect diamonds to appreciate in value.

A) A decrease; demand for; rise

________ in the money supply creates excess ________ money, causing interest rates to ________, everything else held constant. A) A decrease; demand for; rise B) An increase; demand for; fall C) An increase; supply of; rise D) A decrease; supply of; fall

B) An increase; bonds; fall

________ in the money supply creates excess demand for ________, causing interest rates to ________, everything else held constant. A) An increase; money; rise B) An increase; bonds; fall C) A decrease; bonds; rise D) A decrease; money; fall