Question 1

Holding everything else constant,a decrease in the money supply causes

Accepted Answer

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. 
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.

Question 2

When bond prices become less volatile,the demand for bonds ________ and the interest rate ________.

Accepted Answer

A)  increases; rises 
B)  increases; falls 
C)  decreases; falls 
D)  decreases; rises 
A)  increases; rises 
B)  increases; falls 
C)  decreases; falls 
D)  decreases; rises

Question 3

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 ________.

Accepted Answer

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

Question 4

The demand for an asset rises if ________ falls.

Accepted Answer

A)  risk relative to other assets 
B)  expected return relative to other assets 
C)  liquidity relative to other assets 
D)  wealth 
A)  risk relative to other assets 
B)  expected return relative to other assets 
C)  liquidity relative to other assets 
D)  wealth

Question 5

If the liquidity effect is smaller than the other effects,and the adjustment of expected inflation is slow,then the

Accepted Answer

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. 
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.

Question 6

When people begin to expect a large stock market decline,the demand curve for bonds shifts to the ________ and the interest rate ________.

Accepted Answer

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

Question 7

As expected inflation increases for the coming year,we expected the price of gold to ________ due to a rightward shift the in ________ curve.

Accepted Answer

A)  increase; demand 
B)  increase; supply 
C)  decrease; demand 
D)  decrease; supply 
A)  increase; demand 
B)  increase; supply 
C)  decrease; demand 
D)  decrease; supply

Question 8

During business cycle expansions when income and wealth are rising,the demand for bonds ________ and the demand curve shifts to the ________.

Accepted Answer

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

Question 9

When the growth rate of the money supply decreases,interest rates end up being permanently lower if

Accepted Answer

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. 
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.

Question 10

A lower level of income causes the demand for money to ________ and the interest rate to ________.

Accepted Answer

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

Question 11

How will a decrease in the federal government's budget deficit affect the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework.

Accepted Answer

The key to this question is to recognize

Question 12

_______ is the total resources owned by an individual,including all assets.

Accepted Answer

A)  Expected return 
B)  Wealth 
C)  Liquidity 
D)  Risk 
A)  Expected return 
B)  Wealth 
C)  Liquidity 
D)  Risk

Question 13

Figure 4.2
  
-In Figure 4.2,one possible explanation for a decrease in the interest rate from i? t? i? is

Accepted Answer

A)  an increase in government budget deficits. 
B)  an increase in expected inflation. 
C)  a decrease in economic growth. 
D)  a decrease in the riskiness of bonds relative to other investments. 
A)  an increase in government budget deficits. 
B)  an increase in expected inflation. 
C)  a decrease in economic growth. 
D)  a decrease in the riskiness of bonds relative to other investments.

Question 14

An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.

Accepted Answer

A)  fall; fall 
B)  fall; rise 
C)  rise; fall 
D)  rise; rise 
A)  fall; fall 
B)  fall; rise 
C)  rise; fall 
D)  rise; rise

Question 15

An increase in the federal government budget deficit will raise the interest rate on bonds.

Accepted Answer

A) True 
 B)False

Question 16

Factors that can cause the supply curve for bonds to shift to the left include

Accepted Answer

A)  an expansion in overall economic activity. 
B)  a decrease in expected inflation. 
C)  an increase in government deficits. 
D)  only A and C of the above. 
A)  an expansion in overall economic activity. 
B)  a decrease in expected inflation. 
C)  an increase in government deficits. 
D)  only A and C of the above.

Question 17

During a recession,the supply of bonds ________ and the supply curve shifts to the ________.

Accepted Answer

A)  increases; left 
B)  increases; right 
C)  decreases; left 
D)  decreases; right 
A)  increases; left 
B)  increases; right 
C)  decreases; left 
D)  decreases; right

Question 18

Figure 4.4
  
-In Figure 4.4,the most likely cause of a decrease in the equilibrium interest rate from i? t? i? is

Accepted Answer

A)  an increase in the expected inflation rate. 
B)  a decrease in the expected inflation rate. 
C)  a business cycle expansion. 
D)  a combination of both A and C of the above. 
A)  an increase in the expected inflation rate. 
B)  a decrease in the expected inflation rate. 
C)  a business cycle expansion. 
D)  a combination of both A and C of the above.

Question 19

Figure 4.2
  
-In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is

Accepted Answer

A)  an increase in economic growth. 
B)  an increase in government budget deficits. 
C)  a decrease in government budget deficits. 
D)  a decrease in economic growth. 
E)  a decrease in the riskiness of bonds relative to other investments. 
A)  an increase in economic growth. 
B)  an increase in government budget deficits. 
C)  a decrease in government budget deficits. 
D)  a decrease in economic growth. 
E)  a decrease in the riskiness of bonds relative to other investments.

Question 20

When the demand for bonds ________ or the supply of bonds ________,bond prices rise.

Accepted Answer

A)  increases; decreases 
B)  decreases; increases 
C)  decreases; decreases 
D)  increases; increases 
A)  increases; decreases 
B)  decreases; increases 
C)  decreases; decreases 
D)  increases; increases

Exam 4: Why Do Interest Rates Change?

Holding everything else constant,a decrease in the money supply causes

When bond prices become less volatile,the demand for bonds ________ and the interest rate ________.

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 ________.

The demand for an asset rises if ________ falls.

If the liquidity effect is smaller than the other effects,and the adjustment of expected inflation is slow,then the

When people begin to expect a large stock market decline,the demand curve for bonds shifts to the ________ and the interest rate ________.

As expected inflation increases for the coming year,we expected the price of gold to ________ due to a rightward shift the in ________ curve.

During business cycle expansions when income and wealth are rising,the demand for bonds ________ and the demand curve shifts to the ________.

When the growth rate of the money supply decreases,interest rates end up being permanently lower if

A lower level of income causes the demand for money to ________ and the interest rate to ________.

How will a decrease in the federal government's budget deficit affect the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework.

_______ is the total resources owned by an individual,including all assets.

Figure 4.2 -In Figure 4.2,one possible explanation for a decrease in the interest rate from i? t? i? is

An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.

An increase in the federal government budget deficit will raise the interest rate on bonds.

Factors that can cause the supply curve for bonds to shift to the left include

During a recession,the supply of bonds ________ and the supply curve shifts to the ________.

Figure 4.4 -In Figure 4.4,the most likely cause of a decrease in the equilibrium interest rate from i? t? i? is

Figure 4.2 -In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is

When the demand for bonds ________ or the supply of bonds ________,bond prices rise.

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

When bond prices become less volatile,the demand for bonds and the interest rate .

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 .

When people begin to expect a large stock market decline,the demand curve for bonds shifts to the and the interest rate .

As expected inflation increases for the coming year,we expected the price of gold to due to a rightward shift the in curve.

During business cycle expansions when income and wealth are rising,the demand for bonds and the demand curve shifts to the .

A lower level of income causes the demand for money to and the interest rate to .

An increase in the expected rate of inflation causes the demand for bonds to and the supply for bonds to .

During a recession,the supply of bonds and the supply curve shifts to the .

When the demand for bonds or the supply of bonds ,bond prices rise.