Question 1

If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if

Accepted Answer

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.

Question 2

If the Fed wants to permanently lower interest rates, then it should lower the rate of money growth if

Accepted Answer

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.

Question 3

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 4

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 5

When prices in the stock market become more uncertain, 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 6

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

Accepted Answer

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

Question 7

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 8

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.

Question 9

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 10

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 ________.

Accepted Answer

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

Question 11

A ________ prefers stock in a less risky asset than in a riskier asset.

Accepted Answer

A) risk preferrer 
B) risk-averse person 
C) risk lover 
D) risk-favorable person

Question 12

The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on bonds.

Accepted Answer

A) True 
 B)False

Question 13

Factors that cause the demand curve for bonds to shift to the left include

Accepted Answer

A) a decrease in the inflation rate. 
B) an increase in the volatility of stock prices. 
C) an increase in the liquidity of stocks. 
D) all of the above. 
E) only A and B of the above.

Question 14

Identify and explain the four factors that influence asset demand. Which of these factors affect total asset demand and which influence investors to demand one asset over another?

Accepted Answer

The answer of Identify and explain the four factors that...

Question 15

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

Accepted Answer

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

Question 16

When stock prices become less volatile, 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 17

What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called?

Accepted Answer

A) econometric model 
B) liquidity preference framework 
C) market equilibrium 
D) Fisher effect

Question 18

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 19

When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 4: Why Do Interest Rates Change

If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if

If the Fed wants to permanently lower interest rates, then it should lower the rate of money growth if

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

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.

When prices in the stock market become more uncertain, the demand curve for bonds shifts to the and the interest rate .

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

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 .

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

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

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 ________ prefers stock in a less risky asset than in a riskier asset.

The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on bonds.

Factors that cause the demand curve for bonds to shift to the left include

Identify and explain the four factors that influence asset demand. Which of these factors affect total asset demand and which influence investors to demand one asset over another?

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

When stock prices become less volatile, the demand curve for bonds shifts to the and the interest rate .

What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called?

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.

When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right.

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