Exam 5: The Behaviour of Interest Rates

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

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

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.

The riskiness of an asset that is unique to the particular asset is ________.

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 ________.

-If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the ________.

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

The price of gold should be ________ to the expected inflation rate.

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

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the ________.

Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return ________.

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

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

The opportunity cost of holding money is ________.

In Keynes's liquidity preference framework,________.

The ________ the returns on two securities move together,the ________ benefit there is from diversification.

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

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

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

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