Quiz 3

. 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

A

12. The equilibrium price and corresponding equilibrium interest rate in the bond market are found where A) the bond demand curve and the bond supply curve intersect. B) the bond demand is at its peak. C) the bond supply is at its peak. D) cannot be determined looking at the bond demand and bond supply curves.

A

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

A

31. 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

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

C

34. In the figure above, one factor NOT responsible for the decline in the demand for money is A) a decline the price level. B) a decline in income. C) an increase in income. D) a decline in the expected inflation rate.

C

36. In the figure above, the factor responsible for the decline in the interest rate isA) a decline the price level.B) a decline in income.C) an increase in the money supply.D) a decline in the expected inflation rate.

C

39. Which of the following bonds are considered to be default-risk free?A) municipal bondsB) investment-grade bondsC) U.S. Treasury bondsD)junk Bonds

C

43. Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________.A) right; rightB) right; leftC) left; rightD) left; left

C

11. 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

16. 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

D

21. 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; risesB) decreases; decreases; fallsC) increases; decreases; fallsD) decreases; increases; rises

D

15. 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

A

18. In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable, everything else held constant. A) supply; supply; right B) supply; supply; left C) demand; demand; right D) demand; demand; left

A

2. 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

A

24. 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

27. In the figure above, the price of bonds would fall from P1 to P2 when A) inflation is expected to increase in the future. B) interest rates are expected to fall in the future. C) the expected return on bonds relative to other assets is expected to increase in the future. D) the riskiness of bonds falls relative to other assets

A

3. 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

A

40. The spread between the interest rates on bonds with default risk and default-free bonds is called theA) risk premium.B) junk margin.C) bond margin.D) default premium.

A

42. A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium.A) positive; raiseB) positive; lowerC) negative; raiseD) negative; lower

A

45. Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when A) income tax rates are lowered.B) income tax rates are raised.C) municipal bonds become more widely traded.D) corporate bonds become riskier.

A

5. 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

50. The typical shape for a yield curve isA) gently upward sloping.B) mound shaped.C) flat.D) bowl shaped

A

51. When yield curves are steeply upward slopingA) long-term interest rates are above short-term interest rates.B) short-term interest rates are above long-term interest rates.C) short-term interest rates are about the same as long-term interest rates.D) medium-term interest rates are above both short-term and long-term interest rates.

A

52. If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal. A) expected returnB) surprise returnC) surplus returnD) excess return

A

58. 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 A) rise in the future.B) remain unchanged in the future.C) decline moderately in the future.D) decline sharply in the future.

A

6. 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

A

7. 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

A

19. 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; leftB) increase; rightC) decrease; leftD) decrease; right

B

20. Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.A) increase; leftB) increase; rightC) decrease; leftD) decrease; right

B

22. 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; leftB) right; rightC) left; leftD) left; right

B

26. In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is A) an increase in the expected return on bonds relative to other assets. B) a decrease in the expected return on bonds relative to other assets. C) an increase in wealth. D) a reduction in the riskiness of bonds relative to other assets.

B

30. In the figure above, the price of bonds would fall from P2 to P1 if A) there is a business cycle recession. B) there is a business cycle expansion. C) inflation is expected to increase in the future. D) inflation is expected to decrease in the future.

B

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

B

37. In the figure above, the decrease in the interest rate from i1 to i2 can be explained byA) a decrease in money growth.B) an increase in money growth.C) a decline in the expected price level. D) an increase in income.

B

38. The risk structure of interest rates isA) the structure of how interest rates move over time.B) the relationship among interest rates of different bonds with the same maturity.C) the relationship among the term to maturity of different bonds.D) the relationship among interest rates on bonds with different maturities.

B

4. 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

B

56. According to the expectations theory of the term structureA) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for short-term securities.B) interest rates on bonds of different maturities move together over time.C) buyers of bonds prefer short-term to long-term bonds.D) buyers require an additional incentive to hold long-term bonds.

B

59. According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future.B) remain unchanged in the future.C) decline moderately in the future.D) decline sharply in the future.

B

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. A) falls; bonds B) falls; money C) rises; bonds D) rises; money

B

1. 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.

C

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

C

14. When the price of a bond decreases, all else equal, the bond demand curve A) shifts right. B) shifts left. C) does not shift. D) inverts.

C

17. 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

28. In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) expectations of more profitable investment opportunities. D) a business cycle recession

C

29. In the figure above, a factor that could cause the demand for bonds to shift to the right is A) an increase in the riskiness of bonds relative to other assets. B) an increase in the expected rate of inflation. C) expectations of lower interest rates in the future. D) a decrease in wealth

C

44. When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.A) right; rightB) right; leftC) left; rightD) left; left

C

46. Everything else held constant, if income tax rates were lowered, thenA) the interest rate on municipal bonds would fall.B) the interest rate on Treasury bonds would rise.C) the interest rate on municipal bonds would rise.D) the price of Treasury bonds would fall.

C

48. A plot of the interest rates on default-free government bonds with different terms to maturity is calledA) a risk-structure curve.B) a default-free curve.C) a yield curve.D) an interest-rate curve.

C

49. Differences in ________ explain why interest rates on Treasury securities are not all the same.A) riskB) liquidityC) time to maturityD) tax characteristics

C

53. If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond isA) 4 percent.B) 5 percent.C) 6 percent.D) 7 percent.

C

54. If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond isA) 1 percent.B) 2 percent.C) 3 percent.D) 4 percen

C

60. According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to A) rise in the future.B) remain unchanged in the future.C) decline moderately in the future.D) decline sharply in the future.

C

23. Everything else held constant, when the government has higher budget deficitsA) 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

25. In the figure above, a factor that could cause the supply of bonds to shift to the right is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) a recession. D) a business cycle expansion.

D

33. 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.

D

41. If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant.A) decrease; increaseB) decrease; decreaseC) increase; increaseD) increase; decrease

D

47. The term structure of interest rates isA) the relationship among interest rates of different bonds with the same maturity.B) the structure of how interest rates move over time.C) the relationship among the term to maturity of different bonds.D) the relationship among interest rates on bonds with different maturities.

D

55. If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity ofA) two years.B) three years.C) four years.D) five years.

D

57. 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 A) 2 percent.B) 3 percent.C) 4 percent.D) 5 percent.

D

9. 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