Money and Banking Chapter 5
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
