Deck 5: The Economics of Interest-Rate Fluctuations

Question 1

A change in the interest rate does not shift the demand for bonds.

Answer 1

True

Question 2

The supply of bonds shifts to the left with an increase in the Federal government budget deficit.

Answer 2

False

Question 3

A shift in the demand for bonds changes the interest rate but the converse is not true.

Answer 3

True

Question 4

An economic expansion can lead to higher equilibrium bond yields.

Question 5

If the interest rate falls, people will want to hold more bonds, meaning the demand for money shifts to the left.

Question 6

A shift in the supply of bonds changes the interest rate but the converse is not true.

Question 7

An economic expansion can lead to higher equilibrium bond yields if the supply of bonds shifts more than the demand for bonds.

Question 8

A decrease in the money supply can lead to a long-run decrease in the equilibrium interest rate if the price level effect dominates the output effect.

Question 9

If the equilibrium bond yield falls, the demand for bonds shifts to the left, since investors are making a higher return.

Question 10

Interest rates are countercyclical if the effect of GDP growth on investors in bonds is stronger than the effect on firms issuing bonds.

Question 11

If the interest rate rises, people will want to hold fewer bonds, meaning the demand for money shifts to the right.

Question 12

The supply of bonds increases with the yield, since it is more costly for firms to borrow at higher interest rates.

Question 13

The supply of bonds shifts to the right with an increase in expected inflation, since inflation implies greater profit opportunities in the future.

Question 14

Interest rates have generally trended downward since the end of WWII.

Question 15

The supply of bonds shifts to the right with an increase in expected inflation, since inflation reduces burden of borrowing.

Question 16

A change in the interest rate does not shift the supply of bonds.

Question 17

A change in expected inflation affects both the supply and demand for bonds.

Question 18

A recession can lead to a fall in equilibrium bond yields if the demand for bonds shifts more than the supply of bonds.

Question 19

A recession can result in higher equilibrium bond yields.

Question 20

The high nominal yields in the 1970s were primarily due to inflation.

Question 21

Inflation affects the equilibrium yield on bonds due to its impact on

A) the demand for bonds.
B) the supply of bonds.
C) the supply and demand for bonds.
D) none of the above

Question 22

Which of the following affects the supply of bonds?

A) household wealth
B) profit opportunities for firms
C) liquidity
D) all of the above

Question 23

Which of the following affect(s) the demand for bonds?

A) real rate of return
B) household wealth
C) liquidity
D) all of the above

Question 24

An increase in household wealth causes the _____ bonds to shift and for equilibrium interest rates to

A) demand for, rise.
B) demand for, fall.
C) supply of, rise.
D) supply of, fall.

Question 25

Nominal bond yields peaked during the Great Depression.

Question 26

A decrease in the government budget deficit causes the _____ bonds to shift and for equilibrium interest rates to

A) demand for, rise.
B) demand for, fall.
C) supply of, rise.
D) supply of, fall.

Question 27

The end of the Cold War lowered interest rates due to improved business conditions.

Question 28

The price of gold affects the equilibrium yield on bonds due to its impact on

A) the demand for bonds.
B) the supply of bonds.
C) the supply and demand for bonds.
D) none of the above

Question 29

Corporations issue more bonds when

A) their stocks are publicly traded.
B) the government runs a deficit.
C) they perceive opportunities for profitable expansion.
D) all of the above.

Question 30

Household wealth affects the equilibrium yield on bonds due to its impact on

A) the demand for bonds.
B) the supply of bonds.
C) the supply and demand for bonds.
D) none of the above

Question 31

If the Federal Reserve wants to increase the equilibrium interest rate, it will _____ the _____ money.

A) increase, demand for
B) increase, supply of
C) decrease, demand for
D) decrease, supply of

Question 32

Government budget deficits affect the equilibrium yield on bonds due to its impact on

A) the demand for bonds.
B) the supply of bonds.
C) the supply and demand for bonds.
D) none of the above

Question 33

Which of the following affects the supply of bonds?

A) expected inflation
B) profit opportunities for firms
C) government budget deficits
D) all of the above

Question 34

The high nominal yields in the 1990s were primarily due to inflation.

Question 35

An increase in the expected return on bonds causes the _____ bonds to shift and for equilibrium interest rates to

A) demand for, rise.
B) demand for, fall.
C) supply of, rise.
D) supply of, fall.

Question 36

An increase in the money supply decreases the interest rate.

Question 37

Which of the following affects both the supply and demand for bonds?

A) inflation
B) liquidity
C) real return
D) federal budget deficit

Question 38

The supply curve for bonds shifts due to changes in the government budgets, inflation expectations, and general business conditions.

Question 39

Which of the following affects the supply and demand for bonds?

A) liquidity
B) real return
C) government budget deficits
D) none of the above

Question 40

The end of the Cold War lowered interest rates due to lower inflation.

Question 41

A decrease in the money supply leads to an initial increase but a long-run decrease in the equilibrium interest rate if the _____ effect dominates other effects.

A) liquidity
B) income
C) expected inflation
D) none of the above

Question 42

Which of the effects of an increase in the money supply would dominate if the central bank lacks credibility?

A) liquidity
B) price level
C) income
D) none of the above

Question 43

Which of the effects of an increase in the money supply would dominate if the central bank lacks credibility?

A) liquidity
B) price level
C) expected inflation
D) none of the above

Question 44

Which of the following are inversely related to demand?

A) wealth
B) risk
C) returns
D) all of the above

Question 45

A decrease in the money supply leads to a long-run increase in the equilibrium interest rate if the _____ effect dominates other effects.

A) liquidity
B) price level
C) interest rate
D) none of the above

Question 46

Which of the following shifts the demand for bonds to the right?

A) an increase in the price level
B) a decrease in GDP
C) an increase in the interest rate
D) none of the above

Question 47

Use a graph for the supply and demand for bonds to explain the effect of an increase in the government budget deficit on the equilibrium yield.

Question 48

A decrease in the money supply leads to an initial increase but a long-run decrease in the equilibrium interest rate if the _____ effect dominates other effects.

A) liquidity
B) price level
C) expected inflation
D) none of the above

Question 49

A decrease in the money supply leads to a long-run increase in the equilibrium interest rate if the _____ effect dominates other effects.

A) liquidity
B) price level
C) expected inflation
D) none of the above

Question 50

An increase in the money supply leads to an immediate increase in the equilibrium interest rate if the _____ effect dominates the other effects.

A) liquidity
B) price level
C) expected inflation
D) none of the above

Question 51

What are the reasons for the general fall in interest rates between 1920 and World War II?

A) poor business conditions and low confidence in public policies
B) high taxes and stringent government regulations
C) an increase in the demand for bonds
D) an increase in the supply of bonds

Question 52

The demand curve for bonds shifts due to changes in:

A) risk
B) liquidity
C) expected relative returns
D) all of the above

Question 53

What is the one factor that affects both the supply and demand for bonds?

Question 54

Stocks are perceived to be riskier. Explain how bond yields would be affected.

Question 55

Which of the following are positively related to demand?

A) wealth
B) liquidity
C) returns
D) all of the above

Question 56

Show the impact of a decrease in household wealth on the supply and demand for bonds.

Question 57

What are the five reasons bond yields would fall solely due to a shift in the demand for bonds?

Question 58

What are the two reasons bond yields would fall solely due to a shift in supply of bonds?

Question 59

A company that produces computers files a patent on a more efficient way to produce motherboards. What would be the impact on the yield for that company's bonds?

Question 60

Large silver and copper deposits are discovered, lowering the value of those commodities. Explain how bond yields would be affected.

Question 61

When inflation expectations rise, what happens to the demand, and how does the demand curve shift?

Question 62

Use a graph of the interest rate against time to explain the effect of a decrease in the money supply when the liquidity effect dominates than the other effects.

Question 63

A tax cut is funded by an increase in the deficit. On a graph of bond supply and demand, show and explain how this policy could lead to higher interest rates.

Question 64

When would an increase in the money supply immediately increase the interest rate? Would this be more likely for an independent central bank?

Question 65

Using a graph of the supply and demand for money, show how a decrease in the supply of money could lead to a long-run increase in the equilibrium interest rate. Explain.

Question 66

What are the three main reasons the supply curve shifts?

Question 67

If the economy goes into a recession, assuming there is no government response, explain (using a graph) how it would be possible for equilibrium bond yields to fall.

Question 68

Using a graph of the supply and demand for money, show how an increase in the interest rate could lead to a long-term decrease in the equilibrium interest rate, even considering the income effect.

Question 69

If the economy expands, assuming there is no government response, explain (using a graph) how it would be possible for equilibrium bond yields to fall.

Question 70

If inflation falls, show the impact on a graph for the supply and demand for bonds. Explain the effect on the real and nominal yield.

Question 71

Use a graph of the interest rate against time to explain the effect of a decrease in the money supply when the liquidity effect is weaker the other effects.

Question 72

During a recession, what happens to the interest rates and bond prices?

Question 73

The government raises taxes to pay off the debt. Explain how this might have the effect of lowering equilibrium bond yields.