Exam 5: The Behaviour of Interest Rates

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?

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

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

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

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

-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 ________.

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.

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 ________.

-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.

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

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the ________.