Exam 5: The Behaviour of Interest Rates

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

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

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 ________.

-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 ________.

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 ________.

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.

In contrast to the CAPM, the APT assumes that there can be several sources of ________ that cannot be eliminated through diversification.

A return to the gold standard, that is, using gold for money will ________ the ________ for gold, ________ its price, everything else held constant.

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

Everything else held constant, if the expected return on government 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 government bonds and the demand for corporate bonds ________.

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

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

-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 ________.

When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds 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 ________.

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

Holding many risky assets and thus reducing the overall risk an investor faces is called ________.

Of the four factors that influence asset demand, which factor will cause the demand for all assets to increases, 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.

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