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Institutions and Markets ch 4

Terms in this set (40)

As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises.

A) falls; rises
B) falls; falls
C) rises; rises
D) rises; falls
a
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
When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________.

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

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

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

A) above; demand; fall
B) above; demand; rise
C) below; supply; fall
D) above; supply; rise
a
When the demand for bonds ________ or the supply of bonds ________, interest rates rise.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
d
When the demand for bonds ________ or the supply of bonds ________, bond prices fall.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
d
Factors that determine the demand for an asset include changes in the

A) wealth of investors.
B) liquidity of bonds relative to alternative assets.
C) expected returns on bonds relative to alternative assets.
D) risk of bonds relative to alternative assets.
E) all of the above
e
The higher the standard deviation of returns on an asset, the ________ the asset's ________.

A) greater; risk
B) smaller; risk
C) greater; expected return
D) smaller; expected return
a
) In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________.

A) falls; right
B) falls; left
C) rises; right
D) rises; left
b
Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________.

A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
c
When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________.

A) right; falls
B) right; rises
C) left; falls
D) left; rises
a
An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets, and shift the ________ curve to the left

A) reduce; financial; demand
B) reduce; real; demand
C) raise; financial; supply
D) raise; real; supply
b
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________.

A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
d
When bond prices become more volatile, the demand for bonds ________ and the interest rate ________.

A) increases; rises
B) increases; falls
C) decreases; falls
D) decreases; rises
d
When prices in the stock market become more uncertain, the demand curve for bonds shifts to the ________ and the interest rate ________.

A) right; rises
B) right; falls
C) left; falls
D) left; rises
b
When bonds become more widely traded, and as a consequence the market becomes more 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
b
Factors that cause the demand curve for bonds to shift to the left include

A) an increase in the inflation rate.
B) an increase in the liquidity of stocks.
C) a decrease in the volatility of stock prices.
D) all of the above.
E) none of the above.
d
During an economic expansion, the supply of bonds ________ and the supply curve shifts to the ________.

A) increases; left
B) increases; right
C) decreases; left
D) decreases; right
b
An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________.

A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
b
When the federal government's budget deficit decreases, the ________ curve for bonds shifts to the ________.

A) demand; right
B) demand; left
C) supply; left
D) supply; right
c
When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ________ bonds increases and the ________ curve shifts to the right.

A) demand for; demand
B) demand for; supply
C) supply of; demand
D) supply of; supply
d
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) all of the above.
E) only A and B of the above
a
The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________.

A) rise; increases
B) rise; stabilizes
C) rise; decreases
D) fall; increases
E) fall; stabilizes
a
An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.

A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
b
When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________.

A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
b
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
The loanable funds 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) the supply of money; bonds
b
When comparing the loanable funds and liquidity preference frameworks of interest rate determination, which of the following is true?

A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation.
B) The loanable funds framework provides a simpler analysis of the effects of changes in income, the price level, and the supply of money.
C) In most instances, the two approaches to interest rate determination yield the same predictions.
D) All of the above are true.
E) Only A and B of the above are true.
c
A lower level of income causes the demand for money to ________ and the interest rate to ________.

A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
a
A decline in the price level causes the demand for money to ________ and the demand curve to shift to the ________.

A) decrease; right
B) decrease; left
C) increase; right
D) increase; left
b
Holding everything else constant, an increase in the money supply causes

A) interest rates to decline initially.
B) interest rates to increase initially.
C) bond prices to decline initially.
D) both A and C of the above.
E) both B and C of the above.
a
Holding everything else constant, a decrease in the money supply causes

A) interest rates to decline initially.
B) interest rates to increase initially.
C) bond prices to increase initially.
D) both A and C of the above.
E) both B and C of the above.
b
If the liquidity effect is smaller than the other effects, and the adjustment of 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
When the growth rate of the money supply decreases, 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.
d
When the growth rate of the money supply is increased, interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation.

A) larger; rapid
B) larger; slow
C) smaller; slow
D) smaller; rapid
d
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.
d
_______ is the total resources owned by an individual, including all assets.

A) Expected return
B) Wealth
C) Liquidity
D) Risk
b
When the quantity of bonds demanded equals the quantity of bonds supplied, there is

A) excess supply.
B) excess demand.
C) a market equilibrium.
D) an asset market approach.
c
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