Question 1

Suppose there's a 50% chance of a stock rising by 20% and a 50% chance of it falling by 20%. What is the expected rate of return on the stock?

Accepted Answer

A) -20% 
B) 0% 
C) 10% 
D) 20%

Question 2

The bond supply curve slopes up because

Accepted Answer

A) interest rates rise as bond prices rise. 
B) when bond prices are high, inflation is high. 
C) the lender is willing and able to offer more bonds when the price of the bond is low. 
D) the borrower is willing and able to offer more bonds when the price of the bond is high.

Question 3

According to the Fisher effect, an increase in expected inflation results in:

Accepted Answer

A) lower nominal interest rates 
B) higher nominal interest rates 
C) lower real interest rates 
D) higher real interest rates

Question 4

In an article, "Preparing for the Next Black Swan" (Wall Street Journal, Aug 21, 2010), the point is made that diversification may be insufficient in protecting one's portfolio during a "Black Swan" event. Why may this be true?

Accepted Answer

A) virtually all asset classes may decline at the same time 
B) investors may be unable to buy different assets during a "Black Swan" event 
C) some assets may rise while others decline during a "Black Swan" event 
D) Black Swan events are surprises and thus one cannot prepare for such an event.

Question 5

Since Germany is a large open economy, the increase in German borrowing and investment in what was formerly East Germany in the early 1990s resulted in

Accepted Answer

A) a decline in the world real interest rate. 
B) a shift to the right in the German supply of loanable funds curve. 
C) an increase in the real interest rate in the United States. 
D) a shift to the left in the German demand for loanable funds curve.

Question 6

In the market for loanable funds the price of the funds exchanged is

Accepted Answer

A) the price of bonds. 
B) the volume of bonds purchased. 
C) the volume of bonds sold. 
D) the interest rate.

Question 7

The average investor must weigh the benefits of liquidity against

Accepted Answer

A) the high taxes generally levied on liquid assets. 
B) the lower returns on liquid assets. 
C) the high transactions costs involved in disposing of liquid assets. 
D) the greater variability in the nominal returns on liquid assets.

Question 8

An investor who bases the decision to buy an asset solely on the expected return of an asset is considered to be:

Accepted Answer

A) risk loving 
B) risk averse 
C) risk neutral 
D) risk avoiding

Question 9

If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate

Accepted Answer

A) would fall. 
B) would rise. 
C) would be unaffected. 
D) might either rise or fall.

Question 10

In an effort to increase government revenue, Congress and the president decide to increase the corporate profits tax. The likely result will be

Accepted Answer

A) the supply curve for bonds shifts to the left. 
B) the demand curve for bonds shifts to the left. 
C) the equilibrium interest rate rises. 
D) the equilibrium price of bonds falls.

Question 11

Economists believe that as a saver's wealth increases, the saver will generally

Accepted Answer

A) increase his or her holdings of all assets proportionately. 
B) increase the fraction of wealth held as cash. 
C) increase the fraction of wealth held as common stock. 
D) decrease the fraction held as corporate bonds.

Question 12

How should a financial plan of an older saver differ from that of a younger saver?

Accepted Answer

The answer of How should a financial plan of an...

Question 13

As wealth decreases, which of the following is likely to account for a smaller fraction of a saver's portfolio?

Accepted Answer

A) stocks 
B) corporate bonds 
C) cash 
D) U)S. government securities

Question 14

Which type of investor is most likely to have a diversified portfolio?

Accepted Answer

A) risk averse 
B) risk loving 
C) risk neutral 
D) risk tolerant

Question 15

In November 2012, concern was raised about Spain's sovereign debt. Make use of a graph of the bond market to show how this would affect the price of Spanish bonds.

Accepted Answer

The answer of In November 2012, concern was raised about...

Question 16

A small open economy

Accepted Answer

A) is unable to affect the world real interest rate by its borrowing and lending decisions. 
B) will always be a net borrower from abroad. 
C) will always be a net lender abroad. 
D) is almost never able to borrow abroad.

Question 17

A decrease in expected inflation

Accepted Answer

A) usually leads to falling nominal interest rates. 
B) results in increased nominal capital gains on physical assets. 
C) will shift the bond demand curve to the left. 
D) will shift the supply curve for loanable funds to the left.

Question 18

In late 2008 and early 2009, many feared that the economy may experience deflation. Make use of a graph of the bond market to show how this affected interest rates.

Accepted Answer

The answer of In late 2008 and early 2009, many...

Question 19

Which of the following would NOT cause the demand curve for bonds to shift?

Accepted Answer

A) a change in wealth 
B) a change in the price of bonds 
C) a change in the liquidity of bonds 
D) a change in expected inflation

Question 20

If households increase their saving at the same time that the government increases its deficit,

Accepted Answer

A) the demand and supply curves for bonds will be unaffected. 
B) the demand curve for bonds will shift to the left. 
C) the supply curve for bonds will shift to the right. 
D) the equilibrium interest rate will definitely rise.

Exam 4: Determining Interest Rates