Question 1

A ________ prefers stock in a less risky asset than in a riskier asset.

Accepted Answer

A)  risk preferrer 
B)  risk-averse person 
C)  risk lover 
D)  risk-favorable person 
A)  risk preferrer 
B)  risk-averse person 
C)  risk lover 
D)  risk-favorable person B

Question 2

Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________.

Accepted Answer

A)  increase; left 
B)  increase; right 
C)  decrease; left 
D)  decrease; right 
A)  increase; left 
B)  increase; right 
C)  decrease; left 
D)  decrease; right C

Question 3

How is the equilibrium interest rate determined in the bond market? Explain why the interest rate will move toward equilibrium if it is temporarily above or below the equilibrium rate.

Accepted Answer

In layman terms, equilibrium means where the demand and supply are equal or where two things converges. The interest rates are also stated as per the equilibrium prevailing in the market. Hence the interest rates can be above or below the equilibrium price tempoarrily, but the need to converge towards the equilibrium in longer terms or towards their mayturity.if the interest rates are above the equilibrium rate they will tend to decline towards the equilibrium as they approaches maturity or in near terms. Same happens when the interest rates are below the equilibrium rates they will tend to increase towards the equilibrium rate. Hence its a rule of thumb we can say, that the interest rates in the bond markets whetehr in US or glibally are determined on the basis of equilibrium rates prevailing in the markets.

Question 4

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

Accepted Answer

A)  above; rise 
B)  above; fall 
C)  below; fall 
D)  below; rise 
A)  above; rise 
B)  above; fall 
C)  below; fall 
D)  below; rise

Question 5

When the growth rate of the money supply is decreased,interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation.

Accepted Answer

A)  larger; rapid 
B)  larger; slow 
C)  smaller; slow 
D)  smaller; rapid 
A)  larger; rapid 
B)  larger; slow 
C)  smaller; slow 
D)  smaller; rapid

Question 6

If the Fed wants to permanently lower interest rates,then it should lower the rate of money growth if

Accepted Answer

A)  there is fast adjustment of expected inflation. 
B)  there is slow adjustment of expected inflation. 
C)  the liquidity effect is smaller than the expected inflation effect. 
D)  the liquidity effect is larger than the other effects. 
A)  there is fast adjustment of expected inflation. 
B)  there is slow adjustment of expected inflation. 
C)  the liquidity effect is smaller than the expected inflation effect. 
D)  the liquidity effect is larger than the other effects.

Question 7

An increase in an asset's expected return relative to that of an alternative asset,holding everything else unchanged,raises the quantity demanded of the asset.

Accepted Answer

A) True 
 B)False

Question 8

When the growth rate of the money supply is increased,interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation.

Accepted Answer

A)  larger; rapid 
B)  larger; slow 
C)  smaller; slow 
D)  smaller; rapid 
A)  larger; rapid 
B)  larger; slow 
C)  smaller; slow 
D)  smaller; rapid

Question 9

Investors make their choices of which assets to hold by comparing the expected return,liquidity,and risk of alternative assets.

Accepted Answer

A) True 
 B)False

Question 10

When the expected inflation rate increases,the demand for bonds ________,the supply of bonds ________,and the interest rate ________.

Accepted Answer

A)  increases; increases; rises 
B)  decreases; decreases; falls 
C)  increases; decreases; falls 
D)  decreases; increases; rises 
A)  increases; increases; rises 
B)  decreases; decreases; falls 
C)  increases; decreases; falls 
D)  decreases; increases; rises

Question 11

Figure 4.5
  
-Figure 4.5 illustrates the effect of an increased rate of money supply growth.From the figure,one can conclude that the liquidity effect is ________ than the expected inflation effect and interest rates adjust ________ to changes in expected inflation.

Accepted Answer

A)  smaller; quickly 
B)  larger; quickly 
C)  larger; slowly 
D)  smaller; slowly 
A)  smaller; quickly 
B)  larger; quickly 
C)  larger; slowly 
D)  smaller; slowly

Question 12

During an economic expansion,the supply of bonds ________ and the supply curve shifts to the ________.

Accepted Answer

A)  increases; left 
B)  increases; right 
C)  decreases; left 
D)  decreases; right 
A)  increases; left 
B)  increases; right 
C)  decreases; left 
D)  decreases; right

Question 13

When the demand for bonds ________ or the supply of bonds ________,interest rates rise.

Accepted Answer

A)  increases; increases 
B)  increases; decreases 
C)  decreases; decreases 
D)  decreases; increases 
A)  increases; increases 
B)  increases; decreases 
C)  decreases; decreases 
D)  decreases; increases

Question 14

A rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________.

Accepted Answer

A)  decrease; right 
B)  decrease; left 
C)  increase; right 
D)  increase; left 
A)  decrease; right 
B)  decrease; left 
C)  increase; right 
D)  increase; left

Question 15

Figure 4.3
  
-In Figure 4.3,the factor responsible for the decline in the interest rate is

Accepted Answer

A)  a decline in the price level. 
B)  a decline in income. 
C)  an increase in the money supply. 
D)  a decline in the expected inflation rate. 
A)  a decline in the price level. 
B)  a decline in income. 
C)  an increase in the money supply. 
D)  a decline in the expected inflation rate.

Question 16

Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________

Accepted Answer

A)  increase; left. 
B)  increase; right. 
C)  decrease; left. 
D)  decrease; right. 
A)  increase; left. 
B)  increase; right. 
C)  decrease; left. 
D)  decrease; right.

Question 17

When prices in the stock market become more uncertain,the demand curve for bonds shifts to the ________ and the interest rate ________.

Accepted Answer

A)  right; rises 
B)  right; falls 
C)  left; falls 
D)  left; rises 
A)  right; rises 
B)  right; falls 
C)  left; falls 
D)  left; rises

Question 18

In his liquidity preference framework,Keynes assumed that money has a zero rate of return; thus,when interest rates ________ the expected return on money falls relative to the expected return on bonds,causing the demand for money to ________.

Accepted Answer

A)  rise; fall 
B)  rise; rise 
C)  fall; fall 
D)  fall; rise 
A)  rise; fall 
B)  rise; rise 
C)  fall; fall 
D)  fall; rise

Question 19

Explain why the marginal contribution of an asset to the risk of a portfolio does not depend on the risk of the asset in isolation.

Accepted Answer

The marginal contribution of an asset to

Question 20

When the demand for bonds ________ or the supply of bonds ________,interest rates fall.

Accepted Answer

A)  increases; increases 
B)  increases; decreases 
C)  decreases; decreases 
D)  decreases; increases 
A)  increases; increases 
B)  increases; decreases 
C)  decreases; decreases 
D)  decreases; increases

Exam 4: Why Do Interest Rates Change?

A ________ prefers stock in a less risky asset than in a riskier asset.

Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________.

How is the equilibrium interest rate determined in the bond market? Explain why the interest rate will move toward equilibrium if it is temporarily above or below the equilibrium rate.

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

When the growth rate of the money supply is decreased,interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation.

If the Fed wants to permanently lower interest rates,then it should lower the rate of money growth if

An increase in an asset's expected return relative to that of an alternative asset,holding everything else unchanged,raises the quantity demanded of the asset.

When the growth rate of the money supply is increased,interest rates will rise immediately if the liquidity effect is ________ than the other effects and if there is ________ adjustment of expected inflation.

Investors make their choices of which assets to hold by comparing the expected return,liquidity,and risk of alternative assets.

When the expected inflation rate increases,the demand for bonds ________,the supply of bonds ________,and the interest rate ________.

Figure 4.5 -Figure 4.5 illustrates the effect of an increased rate of money supply growth.From the figure,one can conclude that the liquidity effect is ________ than the expected inflation effect and interest rates adjust ________ to changes in expected inflation.

During an economic expansion,the supply of bonds ________ and the supply curve shifts to the ________.

When the demand for bonds ________ or the supply of bonds ________,interest rates rise.

A rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________.

Figure 4.3 -In Figure 4.3,the factor responsible for the decline in the interest rate is

Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand curve to the ________

When prices in the stock market become more uncertain,the demand curve for bonds shifts to the ________ and the interest rate ________.

In his liquidity preference framework,Keynes assumed that money has a zero rate of return; thus,when interest rates ________ the expected return on money falls relative to the expected return on bonds,causing the demand for money to ________.

Explain why the marginal contribution of an asset to the risk of a portfolio does not depend on the risk of the asset in isolation.

When the demand for bonds ________ or the supply of bonds ________,interest rates fall.

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

Higher expected interest rates in the future the demand for long-term bonds and shift the demand curve to the .

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

When the growth rate of the money supply is decreased,interest rates will rise immediately if the liquidity effect is than the other effects and if there is adjustment of expected inflation.

When the growth rate of the money supply is increased,interest rates will rise immediately if the liquidity effect is than the other effects and if there is adjustment of expected inflation.

When the expected inflation rate increases,the demand for bonds ,the supply of bonds ,and the interest rate .

Figure 4.5 -Figure 4.5 illustrates the effect of an increased rate of money supply growth.From the figure,one can conclude that the liquidity effect is than the expected inflation effect and interest rates adjust to changes in expected inflation.

During an economic expansion,the supply of bonds and the supply curve shifts to the .

When the demand for bonds or the supply of bonds ,interest rates rise.

A rise in the price level causes the demand for money to and the demand curve to shift to the .

Lower expected interest rates in the future the demand for long-term bonds and shift the demand curve to the

When prices in the stock market become more uncertain,the demand curve for bonds shifts to the and the interest rate .

In his liquidity preference framework,Keynes assumed that money has a zero rate of return; thus,when interest rates the expected return on money falls relative to the expected return on bonds,causing the demand for money to .

When the demand for bonds or the supply of bonds ,interest rates fall.