Exam 4: Why Do Interest Rates Change?

The supply curve for bonds has the usual upward slope,indicating that as the price ________,ceteris paribus,the ________ increases.

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 ________.

The more liquid an asset is relative to alternative assets,holding everything else unchanged,the more desirable it is,and the greater the quantity demanded.

A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets.

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

When interest rates decrease,the demand curve for bonds shifts to the left.

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 decline in the price level causes the demand for money to ________ and the demand curve to shift to the ________.

Explain the difference between the Capital Asset Pricing Model and the Arbitrage Pricing Theory.

Diversification benefits an investor by

When the federal government's budget deficit decreases,the demand curve for bonds shifts to the right.

In a recession when income and wealth are falling,the demand for bonds ________ and the demand curve shifts to the ________.

The economist Irving Fisher,after whom the Fisher effect is named,explained why interest rates ________ as the expected rate of inflation ________.

Figure 4.2 -In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is a(n)________ in ________.

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

A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________.

Figure 4.3 -In Figure 4.3,an increase in the interest rate from i? t? i? can be explained by

Interest rates are procyclical in that they tend to rise during business cycle expansions and fall during recessions.

When the inflation rate is expected to increase,the expected return on bonds relative to real assets falls for any given interest rate; as a result,the ________ bonds falls and the ________ curve shifts to the left.

When the interest rate on a bond is ________ the equilibrium interest rate,there is excess ________ in the bond market and the interest rate will ________.