Exam 4: Why Do Interest Rates Change

Use the following figure to answer the questions : Figure 4.1: -In Figure 4.1, the most likely cause of the increase in the equilibrium interest rate from i₁ to i₂ is

Use the bond demand and supply framework to explain the Fisher effect and why it occurs.

When the price of a bond is below the equilibrium price, there is excess ________ in the bond market and the price will ________.

When interest rates decrease, the demand curve for bonds shifts to the left.

Use the following figure to answer the questions : Figure 4.1: -In Figure 4.1, the most likely cause of the increase in the equilibrium interest rate from i₁ to i₂ is a(n)________ in the ________.

The higher the standard deviation of returns on an asset, the ________ the asset's ________.

When the federal government's budget deficit decreases, the ________ curve for bonds shifts to the ________.

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

________ is the total resources owned by an individual, including all assets.

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

A lower level of income causes the demand for money to ________ and the interest rate to ________

Interest rates are procyclical in that they tend to rise during business cycle expansions and fall during recessions.

Holding everything else constant, an increase in the money supply causes

Diversification benefits an investor by

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

Use the following figure to answer the questions : Figure 4.2: -In Figure 4.2, one possible explanation for a decrease in the interest rate from i₂ to i₁ is

An increase in expected inflation causes the supply of bonds to ________ and the supply curve to shift to the ________.

A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________.

When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.

When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.