Question 1

When yield curves are downward-sloping,long-term interest rates are above short-term interest rates.

Accepted Answer

A) True 
 B)False

Question 2

When a change in monetary policy is implemented,the initial effect on interest rates is generally the:

Accepted Answer

A)  income effect. 
B)  liquidity effect. 
C)  expected inflation effect. 
D)  wealth effect.

Question 3

To compensate for the uncertainty of future interest rates and the greater default risk for longer term loans,the lender generally:

Accepted Answer

A)  charges a higher rate of interest on long-term loans. 
B)  includes a very high number of restrictive debt provisions. 
C)  is entitled to change the terms of the loan at any time. 
D)  is entitled to demand repayment of the loan at any time.

Question 4

Which of the following statements about segmented markets theory of term structure is correct?

Accepted Answer

A)  It assumes that lenders always lend for short periods. 
B)  It assumes that borrowers have particular periods for which they want to borrow. 
C)  It gives a good explanation of why yield curves usually slope upward. 
D)  It assumes that all bonds are perfect substitutes for each other.

Question 5

In the context of the loanable funds theory,discuss the sectors that supply funds in relation to demand and supply curves.

Accepted Answer

The answer of In the context of the loanable funds...

Question 6

In relation to the term structure of interest rates,the expectations theory assumes:

Accepted Answer

A)  there are a large number of financial investors who hold heterogeneous expectations about future interest rates. 
B)  investors need to take into account costly transactions as they change their expectations. 
C)  long-term rates paid bonds will be equal to the average of short-term interest rates expected to prevail over the longer term period. 
D)  there is some impediment to market rates moving to equilibrium.

Question 7

According to the loanable funds approach to interest rate determination,the demand curve slopes downward because:

Accepted Answer

A)  when interest rates are low, inflation is low. 
B)  the lower the interest rates, the greater the demand for funds. 
C)  the higher the interest rates, the greater the demand for funds. 
D)  the lower the interest rates, the smaller the demand for funds.

Question 8

All of the following will generally make a central bank increase interest rates,except:

Accepted Answer

A)  excessive credit growth. 
B)  increasing surplus balance of payments. 
C)  large changes in price levels. 
D)  heavy downward pressure in the foreign exchange.

Question 9

The segmented markets theory of term structure:

Accepted Answer

A)  explains upward-sloping yield curves as a result of the demand for long-term bonds being high, relative to the demand for short-term bonds. 
B)  explains upward-sloping yield curves as a result of the demand for long-term bonds being low, relative to the demand for short-term bonds. 
C)  explains upward-sloping yield curves as a result of the favourable tax treatment of long-term bonds. 
D)  is unable to explain upward-sloping yield curves.

Question 10

Under the loanable funds approach to explaining and forecasting interest rates,the concept of dishoarding is introduced.Which of the following statements regarding dishoarding is correct?

Accepted Answer

A)  Dishoarding will occur as interest rates rise. 
B)  Dishoarding will occur as interest rates fall. 
C)  Dishoarding will change the slope of the demand curve. 
D)  Dishoarding is caused by government budget deficits.

Question 11

It is argued that one of the weaknesses of the loanable funds approach is that a final equilibrium interest rate cannot be determined.Which of the following statements supports this argument?

Accepted Answer

A)  An equilibrium interest rate will affect savings at that level, which will affect the loanable funds demand curve. 
B)  Dishoarding of loanable funds will continue for successive periods. 
C)  In the loanable funds approach, the supply and demand curves are interdependent. 
D)  Changes in the money supply in one period need to be matched in ensuing periods.

Question 12

According to expectations theory of term structure,a normal curve will result from expectations that future short-term rates will be higher than current short-term rates.

Accepted Answer

A) True 
 B)False

Question 13

Consider the following graph:  Using the loanable funds approach to interest rate determination,what does the curve in the above graph represent?

Accepted Answer

A)  Household sector supply of loanable funds 
B)  Business sector demand for loanable funds 
C)  Overseas sector and household sector supply of loanable funds 
D)  Government sector and business sector demand for loanable funds

Question 14

During periods of economic recession,it is probable that the risk premium gaps for different corporate borrowers will:

Accepted Answer

A)  decrease. 
B)  increase. 
C)  remain unchanged. 
D)  widen.

Question 15

In relation to economic indicators,a leading indicator is:

Accepted Answer

A)  one that provides same-time tracking of the level of economic activity. 
B)  one that measures from peak to peak of the business cycle. 
C)  an indicator such as unemployment data. 
D)  one that changes before changes in the business cycle.

Question 16

When interest rates increase and normal cash holdings are decreased and invested in securities,this is called:

Accepted Answer

A)  consumption. 
B)  dishoarding. 
C)  reinvestment. 
D)  disintermediation.

Question 17

The idea that a normal yield curve is most frequently observed can be explained by the __________ theory/theories.

Accepted Answer

A)  expectations 
B)  segmented 
C)  expectations and liquidity premium 
D)  segmented and liquidity premium

Question 18

The risk structure of interest rates refers to the:

Accepted Answer

A)  amount of extra interest necessary to compensate investors for the greater default risk of some bonds. 
B)  relationship among the interest rates on bonds with the same maturity. 
C)  relationship among the interest rates on similar bonds with different maturities. 
D)  amount of extra interest needed to compensate investors for the lesser liquidity of some bonds.

Question 19

As a factor explaining yield differences between Australian Treasury bonds,default risk is:

Accepted Answer

A)  important, but other factors such as market risk are more crucial. 
B)  always an important factor. 
C)  rarely important. 
D)  never an issue.

Question 20

The segmented markets theory for explaining the term structure of interest rates assumes that:

Accepted Answer

A)  bond prices and yields are positively related. 
B)  the yield curve is upward-sloping. 
C)  the yield curve is flat. 
D)  securities in different maturity ranges are not alternatives for one another.

Exam 13: An Introduction to Interest Rate Determination and Forecasting