Deck 5: The Behaviour of Interest Rates

Question 1

Pieces of property that serve as a store of value are called ________.

A) assets
B) units of account
C) liabilities
D) borrowings

Answer 1

A

Question 2

The demand for gold increases,other things equal,when ________.

A) the market for silver becomes more liquid
B) interest rates are expected to rise
C) interest rates are expected to fall
D) real estate prices are expected to increase

Answer 2

B

Question 3

Of the four factors that influence asset demand,which factor will cause the demand for all assets to increases,everything else held constant?

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

Answer 3

A

Question 4

An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets,everything else held constant.

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

Question 5

You would be less willing to purchase bonds,other things equal,if ________.

A) you inherit $1 million from your Uncle Harry
B) you expect interest rates to fall
C) gold becomes more liquid
D) stock prices are expected to fall

Question 6

If stock prices are expected to drop dramatically,then,other things equal,the demand for stocks will ________ and that of Treasury bills will ________.

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

Question 7

If gold becomes acceptable as a medium of exchange,the demand for gold will ________ and the demand for bonds will ________,everything else held constant.

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

Question 8

Everything else held constant,a decrease in wealth ________.

A) increases the demand for stocks
B) increases the demand for bonds
C) reduces the demand for silver
D) increases the demand for gold

Question 9

An increase in an asset's expected return relative to that of an alternative asset,holding everything else constant,________ the quantity demanded of the asset.

A) increases
B) decreases
C) has no effect on
D) erases

Question 10

The demand for silver decreases,other things equal,when ________.

A) the gold market is expected to boom
B) the market for silver becomes more liquid
C) wealth grows rapidly
D) interest rates are expected to rise

Question 11

If fluctuations in interest rates become smaller,then,other things equal,the demand for stocks ________ and the demand for long-term bonds ________.

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

Question 12

If the price of gold becomes less volatile,then,other things equal,the demand for stocks will ________ and the demand for gold will ________.

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

Question 13

Holding all other factors constant,the quantity demanded of an asset is ________.

A) positively related to wealth
B) negatively related to its expected return relative to alternative assets
C) positively related to the risk of its returns relative to alternative assets
D) negatively related to its liquidity relative to alternative assets

Question 14

Everything else held constant,if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent,then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.

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

Question 15

Everything else held constant,if the expected return on ABC stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged,then the expected return of holding CBS stock ________ relative to ABC stock and the demand for CBS stock ________.

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

Question 16

Everything else held constant,would an increase in volatility of stock prices have any impact on the demand for rare coins? Why or why not?

Question 17

If housing prices are expected to increase,then,other things equal,the demand for houses will ________ and that of Treasury bills will ________.

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

Question 18

Everything else held constant,if the expected return on bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent,then the expected return of holding GE stock ________ relative to bonds and the demand for GE stock ________.

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

Question 19

If brokerage commissions on bond sales decrease,then,other things equal,the demand for bonds will ________ and the demand for real estate will ________.

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

Question 20

Everything else held constant,if the expected return on bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent,then the expected return of corporate bonds ________ relative to bonds and the demand for corporate bonds ________.

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

Question 21

Everything else held constant,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) right; rises
B) right; falls
C) left; falls
D) left; rises

Question 22

A movement along the bond demand or supply curve occurs when ________ changes.

A) bond price
B) income
C) wealth
D) expected return

Question 23

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

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

Question 24

When the price of a bond decreases,all else equal,the bond demand curve ________.

A) shifts right
B) shifts left
C) does not shift
D) inverts

Question 25

Everything else held constant,when stock prices become less volatile,the demand curve for bonds shifts to the ________ and the interest rate ________.

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

Question 26

Everything else held constant,an increase in expected inflation,lowers the expected return on ________ compared to ________ assets.

A) bonds; financial
B) bonds; real
C) physical; financial
D) physical; real

Question 27

Everything else held constant,when households save less,wealth and the demand for bonds ________ and the bond demand curve shifts ________.

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

Question 28

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

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

Question 29

The demand curve for bonds has the usual downward slope,indicating that at ________ prices of the bond,everything else equal,the ________ is higher.

A) higher; demand
B) higher; quantity demanded
C) lower; demand
D) lower; quantity demanded

Question 30

In the figure above,a factor that could cause the demand for bonds to decrease (shift to the left)is ________.

A) an increase in the expected return on bonds relative to other assets
B) a decrease in the expected return on bonds relative to other assets
C) an increase in wealth
D) a reduction in the riskiness of bonds relative to other assets

Question 31

In a business cycle expansion,the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable.

A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left

Question 32

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

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

Question 33

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

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

Question 34

In the bond market,the market equilibrium shows the market-clearing ________ and market-clearing ________.

A) price; deposit
B) interest rate; deposit
C) price; interest rate
D) interest rate; premium

Question 35

Everything else held constant,an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________.

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

Question 36

The supply curve for bonds has the usual upward slope,indicating that as the price ________,ceteris paribus,the ________ increases.

A) falls; supply
B) falls; quantity supplied
C) rises; supply
D) rises; quantity supplied

Question 37

During a recession,the supply of bonds ________ and the supply curve shifts to the ________,everything else held constant.

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

Question 38

If the price of bonds is set ________ the equilibrium price,the quantity of bonds demanded exceeds the quantity of bonds supplied,a condition called excess ________.

A) above; demand
B) above; supply
C) below; demand
D) below; supply

Question 39

Everything else held constant,an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________.

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

Question 40

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

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

Question 41

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

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

Question 42

In the figure above,the price of bonds would fall from P2 to P1 if ________.

A) there is a business cycle recession
B) there is a business cycle expansion
C) inflation is expected to increase in the future
D) inflation is expected to decrease in the future

Question 43

Everything else held constant,during a business cycle expansion,the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities,while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion.

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

Question 44

When the inflation rate is expected to increase,the ________ for bonds falls,while the ________ curve shifts to the right,everything else held constant.

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

Question 45

What is the impact on interest rates when the Bank of Canada decreases the money supply by selling bonds to the public?

Question 46

In the figure above,a factor that could cause the demand for bonds to shift to the right is ________.

A) an increase in the riskiness of bonds relative to other assets
B) an increase in the expected rate of inflation
C) expectations of lower interest rates in the future
D) a decrease in wealth

Question 47

In the figure above,the price of bonds would fall from P1 to P2 if ________.

A) inflation is expected to increase in the future
B) interest rates are expected to fall in the future
C) the expected return on bonds relative to other assets is expected to increase in the future
D) the riskiness of bonds falls relative to other assets

Question 48

In Keynes's liquidity preference framework,________.

A) the demand for bonds must equal the supply of money
B) the demand for money must equal the supply of bonds
C) an excess demand of bonds implies an excess demand for money
D) an excess supply of bonds implies an excess demand for money

Question 49

When the economy slips into a recession,normally the demand for bonds ________,the supply of bonds ________,and the interest rate ________,everything else held constant.

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

Question 50

In the figure above,a factor that could cause the supply of bonds to shift to the right is ________.

A) a decrease in government budget deficits
B) a decrease in expected inflation
C) a recession
D) a business cycle expansion

Question 51

Use demand and supply analysis to explain why an expectation of interest rate hikes would cause Government bond prices to fall.

Question 52

A decrease in the brokerage commissions in the housing market from 6 percent to 5 percent of the sales price will shift the ________ curve for bonds to the ________,everything else held constant.

A) demand; right
B) demand; left
C) supply; right
D) supply; left

Question 53

The bond supply and demand framework is easier to use when analyzing the effects of changes in ________,while the liquidity preference framework provides a simpler analysis of the effects from changes in income,the price level,and the supply of ________.

A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money

Question 54

In Keynes's liquidity preference framework,if there is excess demand for money,there is ________.

A) excess demand for bonds
B) equilibrium in the bond market
C) excess supply of bonds
D) too much money.

Question 55

Demonstrate graphically the effect of an increase in the personal savings rate.Show and explain the effect of increased savings on bond prices and interest rates.How would this change affect capital spending?

Question 56

In the figure above,a factor that could cause the supply of bonds to increase (shift to the right)is ________.

A) a decrease in government budget deficits
B) a decrease in expected inflation
C) expectations of more profitable investment opportunities
D) a business cycle recession

Question 57

In the 1990s Japan had the lowest interest rates in the world due to a combination of ________.

A) inflation and recession
B) deflation and expansion
C) inflation and expansion
D) deflation and recession

Question 58

When the government has a surplus,as occurred in the late 1990s,the ________ curve of bonds shifts to the ________,everything else held constant.

A) supply; right
B) supply; left
C) demand; right
D) demand; left

Question 59

Demonstrate graphically and explain how increased profitability of investments and increased deficits affect bond prices and interest rates.

Question 60

Demonstrate graphically and explain the effect in the bond market of a decrease in the federal deficit.What is the effect on the interest rate and bond prices? How might capital spending be affected by the deficit?

Question 61

The opportunity cost of holding money is ________.

A) the level of income
B) the price level
C) the interest rate
D) the discount rate

Question 62

If there is an excess supply of money ________.

A) individuals sell bonds, causing the interest rate to rise
B) individuals sell bonds, causing the interest rate to fall
C) individuals buy bonds, causing interest rates to fall
D) individuals buy bonds, causing interest rates to rise

Question 63

In Keynes's liquidity preference framework,as the expected return on bonds increases (holding everything else unchanged),the expected return on money ________,causing the demand for ________ to fall.

A) falls; bonds
B) falls; money
C) rises; bonds
D) rises; money

Question 64

In the figure above,the decrease in the interest rate from i1 to i2 can be explained by ________.

A) a decrease in money growth
B) an increase in money growth
C) a decline in the expected price level
D) an increase in income

Question 65

Keynes assumed that money has ________ rate of return.

A) a positive
B) a negative
C) a zero
D) an increasing

Question 66

When real income ________,the demand curve for money shifts to the ________ and the interest rate ________,everything else held constant.

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

Question 67

In the Keynesian liquidity preference framework,a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________,everything else held constant.

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

Question 68

A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________,everything else held constant.

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

Question 69

A lower level of income causes the demand for money to ________ and the interest rate to ________,everything else held constant.

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

Question 70

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.

A) liquidity
B) price level
C) expected-inflation
D) income

Question 71

In the market for money,an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.

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

Question 72

An increase in the interest rate ________.

A) increases the demand for money
B) increases the quantity of money demanded
C) decreases the demand for money
D) decreases the quantity of money demanded

Question 73

In the figure above,the factor responsible for the decline in the interest rate is ________.

A) a decline the price level
B) a decline in income
C) an increase in the money supply
D) a decline in the expected inflation rate

Question 74

A business cycle expansion increases income,causing money demand to ________ and interest rates to ________,everything else held constant.

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

Question 75

When the interest rate is above the equilibrium interest rate,there is an excess ________ money and the interest rate will ________.

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

Question 76

In the figure above,the decrease in the interest rate from i1 to i2 can be explained by ________.

A) a decrease in money growth
B) a decline in the expected price level
C) an increase in income
D) an increase in the expected price level

Question 77

In the Keynesian liquidity preference framework,an increase in the interest rate causes the demand curve for money to ________,everything else held constant.

A) shift right
B) shift left
C) stay where it is
D) invert

Question 78

In the figure above,one factor not responsible for the decline in the demand for money is ________.

A) a decline the price level
B) a decline in income
C) an increase in income
D) a decline in the expected inflation rate

Question 79

A rise in the price level causes the demand for money to ________ and the interest rate to ________,everything else held constant.

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

Question 80

________ in the money supply creates excess ________ money,causing interest rates to ________,everything else held constant.

A) A decrease; demand for; rise
B) An increase; demand for; fall
C) An increase; supply of; rise
D) A decrease; supply of; fall