Exam 5: The Behaviour of Interest Rates

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

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

Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the ________.

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

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 ________.

An increase in the interest rate ________.

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

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

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

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 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 limitation of the CAPM is the assumption that ________.

The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio.

Economists recognize that interest rates are typically procyclical, meaning that interest rates increase during economic expansions and decline during recessions. Real income and generally inflation rise and fall with the economy. Using the liquidity preference model of interest rates, give three reasons why interest rates are procyclical.

Holding everything else constant, if the price of a Bitcoin becomes less volatile, the demand for bonds ________, the price of bonds ________, and the interest rate ________.

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?

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 ________.

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

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?

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?