Exam 4: Why Do Interest Rates Change

What is the expected return on a bond if the return is 9% two-thirds of the time and 3% one-third of the time? What is the standard deviation of the returns on this bond? Would you prefer this bond or one with an identical expected return and a standard deviation of 4.5? Why?

Figure 4.4 -Figure 4.4 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the

How is the equilibrium interest rate determined in the bond market? Explain why the interest rate will move toward equilibrium if it is temporarily above or below the equilibrium rate.

When the demand for bonds ________ or the supply of bonds ________, interest rates rise.

When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and the price will ________.

Milton Friedman contends that it is entirely possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation.

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

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

Figure 4.4 -Figure 4.4 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the liquidity effect is ________ than the expected inflation effect and interest rates adjust ________ to changes in expected inflation.

Identify and describe three factors that cause the supply curve for bonds to shift.

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

Determining asset prices using stocks of assets rather than flow is called

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

If investors perceive greater interest rate risk, what will happen to the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework.

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

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

When bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.

When an economy grows out of a recession, normally the demand for bonds increases and the supply of bonds increases.

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.

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