Question 1

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?

Accepted Answer

The answer of What is the expected return on a...

Question 2

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

Accepted Answer

A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. 
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. 
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. 
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Question 3

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.

Accepted Answer

The answer of How is the equilibrium interest rate determined...

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

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

Question 6

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.

Accepted Answer

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

Question 7

In a recession when income and wealth are falling, 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

Question 8

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

Question 9

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.

Accepted Answer

A) smaller; quickly 
B) larger; quickly 
C) larger; slowly 
D) smaller; slowly

Question 10

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

Accepted Answer

The answer of Identify and describe three factors that cause...

Question 11

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

Accepted Answer

A) reduce; financial 
B) reduce; real 
C) raise; financial 
D) raise; real

Question 12

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

Accepted Answer

A) asset transformation. 
B) expected return. 
C) asset market approach. 
D) market equilibrium.

Question 13

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

Question 14

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.

Accepted Answer

The answer of If investors perceive greater interest rate risk,...

Question 15

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

Question 16

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

Accepted Answer

A) real assets and financial assets. 
B) stocks and bonds. 
C) money and bonds. 
D) money and gold.

Question 17

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 ________.

Accepted Answer

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

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 answer of How will a decrease in the federal...

Question 20

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

Accepted Answer

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

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 .

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 ________.

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.

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

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

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

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 .

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