Exam 5: The Behaviour of Interest Rates

The riskiness of an asset is measured by ________.

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

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 ________.

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 ________.

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.

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

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

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

An increase in the interest rate ________.

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 ________.

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.

When stock prices become more volatile, the ________ curve for gold shifts right and gold prices ________, everything else held constant.

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

A limitation of the CAPM is the assumption that ________.

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

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.

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

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

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