Test Bank Financial Markets and Institutions 8th Edition by Frederic S. Mishkin , Stanley Eakins 

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5. Short questions
6. Essay question

Financial Markets and Institutions 8th Edition by Frederic S. Mishkin , Stanley Eakins Test bank

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Financial Markets and Institutions, 8e (Mishkin)

Chapter 4  Why Do Interest Rates Change?

4.1  Multiple Choice

1) As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises.

A) falls; rises

B) falls; falls

C) rises; rises

D) rises; falls

Answer: A

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

2) The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases.

A) falls; supply

B) falls; quantity supplied

C) rises; supply

D) rises; quantity supplied

Answer: D

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) demand; rise

B) demand; fall

C) supply; fall

D) supply; rise

Answer: C

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) demand; rise

B) demand; fall

C) supply; fall

D) supply; rise

Answer: A

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) above; rise

B) above; fall

C) below; fall

D) below; rise

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) above; rise

B) above; fall

C) below; fall

D) below; rise

Answer: D

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) demand; rise

B) demand; fall

C) supply; fall

D) supply; rise

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) demand; rise

B) demand; fall

C) supply; fall

D) supply; rise

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) above; demand; fall

B) above; demand; rise

C) below; supply; fall

D) above; supply; rise

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) below; demand; rise

B) below; demand; fall

C) below; supply; rise

D) above; supply; fall

Answer: C

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) increases; increases

B) increases; decreases

C) decreases; decreases

D) decreases; increases

Answer: D

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) increases; increases

B) increases; decreases

C) decreases; decreases

D) decreases; increases

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

13) When the demand for bonds ________ or the supply of bonds ________, bond prices rise.

A) increases; decreases

B) decreases; increases

C) decreases; decreases

D) increases; increases

Answer: A

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

14) When the demand for bonds ________ or the supply of bonds ________, bond prices fall.

A) increases; increases

B) increases; decreases

C) decreases; decreases

D) decreases; increases

Answer: D

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

15) Factors that determine the demand for an asset include changes in the

A) wealth of investors.

B) liquidity of bonds relative to alternative assets.

C) expected returns on bonds relative to alternative assets.

D) risk of bonds relative to alternative assets.

E) all of the above.

Answer: E

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

16) The demand for an asset rises if ________ falls.

A) risk relative to other assets

B) expected return relative to other assets

C) liquidity relative to other assets

D) wealth

Answer: A

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

17) The higher the standard deviation of returns on an asset, the ________ the asset’s ________.

A) greater; risk

B) smaller; risk

C) greater; expected return

D) smaller; expected return

Answer: A

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

18) Diversification benefits an investor by

A) increasing wealth.

B) increasing expected return.

C) reducing risk.

D) increasing liquidity.

Answer: C

Topic: Chapter 4.A1 Models of Asset Pricing

Question Status: Previous Edition

19) In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________.

A) falls; right

B) falls; left

C) rises; right

D) rises; left

Answer: B

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

20) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________.

A) falls; right

B) falls; left

C) rises; right

D) rises; left

Answer: C

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

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

A) increase; left

B) increase; right

C) decrease; left

D) decrease; right

Answer: C

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

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

A) increase; left.

B) increase; right.

C) decrease; left.

D) decrease; right.

Answer: B

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

23) When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________ and the interest rate ________.

A) right; falls

B) right; rises

C) left; falls

D) left; rises

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

24) When people begin to expect a large run up in stock prices, the demand curve for bonds shifts to the ________ and the interest rate ________.

A) right; rises

B) right; falls

C) left; falls

D) left; rises

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

25) An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets, and shift the ________ curve to the left.

A) reduce; financial; demand

B) reduce; real; demand

C) raise; financial; supply

D) raise; real; supply

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

26) A decrease in the expected rate of inflation will ________ the expected return on bonds relative to that on ________ assets.

A) reduce; financial

B) reduce; real

C) raise; financial

D) raise; real

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) increases; increases; rises

B) decreases; decreases; falls

C) increases; decreases; falls

D) decreases; increases; rises

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

28) When the expected inflation rate decreases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________.

A) increases; increases; rises

B) decreases; decreases; falls

C) increases; decreases; falls

D) decreases; increases; rises

Answer: C

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

29) When bond prices become more volatile, the demand for bonds ________ and the interest rate ________.

A) increases; rises

B) increases; falls

C) decreases; falls

D) decreases; rises

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

30) When bond prices become less volatile, the demand for bonds ________ and the interest rate ________.

A) increases; rises

B) increases; falls

C) decreases; falls

D) decreases; rises

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) right; rises

B) right; falls

C) left; falls

D) left; rises

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

32) When stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.

A) right; rises

B) right; falls

C) left; falls

D) left; rises

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

33) 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 ________.

A) right; rises

B) right; falls

C) left; falls

D) left; rises

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) right; rises

B) right; falls

C) left; falls

D) left; rises

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

35) Factors that cause the demand curve for bonds to shift to the left include

A) an increase in the inflation rate.

B) an increase in the liquidity of stocks.

C) a decrease in the volatility of stock prices.

D) all of the above.

E) none of the above.

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

36) Factors that cause the demand curve for bonds to shift to the left include

A) a decrease in the inflation rate.

B) an increase in the volatility of stock prices.

C) an increase in the liquidity of stocks.

D) all of the above.

E) only A and B of the above.

Answer: C

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) increases; left

B) increases; right

C) decreases; left

D) decreases; right

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

38) During a recession, the supply of bonds ________ and the supply curve shifts to the ________.

A) increases; left

B) increases; right

C) decreases; left

D) decreases; right

Answer: C

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) increase; left

B) increase; right

C) decrease; left

D) decrease; right

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

40) When the federal governments budget deficit increases, the ________ curve for bonds shifts to the ________.

A) demand; right

B) demand; left

C) supply; left

D) supply; right

Answer: D

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) demand; right

B) demand; left

C) supply; left

D) supply; right

Answer: C

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

42) When the inflation rate is expected to increase, the expected return on bonds relative to real assets falls for any given interest rate; as a result, the ________ bonds falls and the ________ curve shifts to the left.

A) demand for; demand

B) demand for; supply

C) supply of; demand

D) supply of; supply

Answer: A

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

43) When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; as a result, the ________ bonds increases and the ________ curve shifts to the right.

A) demand for; demand

B) demand for; supply

C) supply of; demand

D) supply of; supply

Answer: D

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

Figure 4.4

44) In Figure 4.4, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is

A) an increase in the price of bonds.

B) a business cycle boom.

C) an increase in the expected inflation rate.

D) a decrease in the expected inflation rate.

Answer: C

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

45) In Figure 4.4, the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is a(n) ________ in the ________.

A) increase; expected inflation rate

B) decrease; expected inflation rate

C) increase; government budget deficit

D) decrease; government budget deficit

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

46) In Figure 4.4, the most likely cause of a decrease in the equilibrium interest rate from i2 to i1 is

A) an increase in the expected inflation rate.

B) a decrease in the expected inflation rate.

C) a business cycle expansion.

D) a combination of both A and C of the above.

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

47) Factors that can cause the supply curve for bonds to shift to the right include

A) an expansion in overall economic activity.

B) a decrease in expected inflation.

C) a decrease in government deficits.

D) all of the above.

E) only A and B of the above.

Answer: A

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

48) Factors that can cause the supply curve for bonds to shift to the left include

A) an expansion in overall economic activity.

B) a decrease in expected inflation.

C) an increase in government deficits.

D) only A and C of the above.

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

49) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________.

A) rise; increases

B) rise; stabilizes

C) rise; decreases

D) fall; increases

E) fall; stabilizes

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

50) An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.

A) fall; fall

B) fall; rise

C) rise; fall

D) rise; rise

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) fall; fall

B) fall; rise

C) rise; fall

D) rise; rise

Answer: C

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

52) When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________.

A) increases; increases; rises

B) decreases; decreases; falls

C) increases; decreases; falls

D) decreases; increases; rises

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

53) When the economy enters into a boom, normally the demand for bonds ________,

the supply of bonds ________, and the interest rate ________.

A) increases; increases; rises

B) decreases; decreases; falls

C) increases; decreases; rises

D) decreases; increases; rises

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

Figure 4.2

54) In Figure 4.2, one possible explanation for the increase in the interest rate from i1 to i2 is a(n) ________ in ________.

A) increase; the expected inflation rate

B) decrease; the expected inflation rate

C) increase; economic growth

D) decrease; economic growth

Answer: C

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

55) In Figure 4.2, one possible explanation for the increase in the interest rate from i1 to i2 is

A) an increase in economic growth.

B) an increase in government budget deficits.

C) a decrease in government budget deficits.

D) a decrease in economic growth.

E) a decrease in the riskiness of bonds relative to other investments.

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

56) In Figure 4.2, one possible explanation for a decrease in the interest rate from i2 to i1 is

A) an increase in government budget deficits.

B) an increase in expected inflation.

C) a decrease in economic growth.

D) a decrease in the riskiness of bonds relative to other investments.

Answer: C

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

57) In Keynes’s liquidity preference framework, individuals are assumed to hold their wealth in two forms:

A) real assets and financial assets.

B) stocks and bonds.

C) money and bonds.

D) money and gold.

Answer: C

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

58) 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 ________.

A) rise; fall

B) rise; rise

C) fall; fall

D) fall; rise

Answer: A

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

59) The loanable funds 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 ________.

A) expected inflation; bonds

B) expected inflation; money

C) government budget deficits; bonds

D) the supply of money; bonds

Answer: B

Topic: Chapter 4.A3 Loanable Funds Framework

Question Status: Previous Edition

60) When comparing the loanable funds and liquidity preference frameworks of interest rate determination, which of the following is true?

A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation.

B) The loanable funds framework provides a simpler analysis of the effects of changes in income, the price level, and the supply of money.

C) In most instances, the two approaches to interest rate determination yield the same predictions.

D) All of the above are true.

E) Only A and B of the above are true.

Answer: C

Topic: Chapter 4.A3 Loanable Funds Framework

Question Status: Previous Edition

61) A higher level of income causes the demand for money to ________ and the interest rate to ________.

A) decrease; decrease

B) decrease; increase

C) increase; decrease

D) increase; increase

Answer: D

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

A) decrease; decrease

B) decrease; increase

C) increase; decrease

D) increase; increase

Answer: A

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) decrease; right

B) decrease; left

C) increase; right

D) increase; left

Answer: C

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

64) A decline in the price level causes the demand for money to ________ and the demand curve to shift to the ________.

A) decrease; right

B) decrease; left

C) increase; right

D) increase; left

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

65) A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________.

A) decrease; right

B) decrease; left

C) increase; right

D) increase; left

Answer: B

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

A) interest rates to decline initially.

B) interest rates to increase initially.

C) bond prices to decline initially.

D) both A and C of the above.

E) both B and C of the above.

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

67) Holding everything else constant, a decrease in the money supply causes

A) interest rates to decline initially.

B) interest rates to increase initially.

C) bond prices to increase initially.

D) both A and C of the above.

E) both B and C of the above.

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

Figure 4.3

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

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.

Answer: C

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

69) In Figure 4.3, the decrease in the interest rate from i1 to i2 can be explained by

A) a decrease in money growth.

B) an increase in money growth.

C) a decline in the expected price level.

D) only A and B of the above.

Answer: B

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

70) In Figure 4.3, an increase in the interest rate from i2 to i1 can be explained by

A) a decrease in money growth.

B) an increase in money growth.

C) a decline in the price level.

D) an increase in the expected price level.

Answer: A

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

71) If the liquidity effect is smaller than the other effects, and the adjustment of expected inflation is slow, then the

A) interest rate will fall.

B) interest rate will rise.

C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth.

D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth.

Answer: C

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

72) When the growth rate of the money supply increases, interest rates end up being permanently lower if

A) the liquidity effect is larger than the other effects.

B) there is fast adjustment of expected inflation.

C) there is slow adjustment of expected inflation.

D) the expected inflation effect is larger than the liquidity effect.

Answer: A

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

73) When the growth rate of the money supply decreases, interest rates end up being permanently lower if

A) the liquidity effect is larger than the other effects.

B) there is fast adjustment of expected inflation.

C) there is slow adjustment of expected inflation.

D) the expected inflation effect is larger than the liquidity effect.

Answer: D

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

74) 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.

A) larger; rapid

B) larger; slow

C) smaller; slow

D) smaller; rapid

Answer: B

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

75) 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.

A) larger; rapid

B) larger; slow

C) smaller; slow

D) smaller; rapid

Answer: D

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

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

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.

Answer: C

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

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

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.

Answer: D

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

78) Milton Friedman contends that it is entirely possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation.

A) fall; liquidity

B) fall; risk

C) rise; liquidity

D) rise; risk

Answer: C

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

Figure 4.5

79) 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.

A) smaller; quickly

B) larger; quickly

C) larger; slowly

D) smaller; slowly

Answer: C

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

80) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the

A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.

B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.

C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.

D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Answer: A

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: Previous Edition

81) _______ is the total resources owned by an individual, including all assets.

A) Expected return

B) Wealth

C) Liquidity

D) Risk

Answer: B

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

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

A) risk preferrer

B) risk-averse person

C) risk lover

D) risk-favorable person

Answer: B

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

83) When the quantity of bonds demanded equals the quantity of bonds supplied, there is

A) excess supply.

B) excess demand.

C) a market equilibrium.

D) an asset market approach.

Answer: C

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

84) Determining asset prices using stocks of assets rather than flow is called

A) asset transformation.

B) expected return.

C) asset market approach.

D) market equilibrium.

Answer: C

Topic: Chapter 4.A1 Models of Asset Pricing

Question Status: Previous Edition

85) What is the model whose equations are estimated using statistical procedures used in forecasting interest rates called?

A) Econometric model

B) Liquidity preference framework

C) Market equilibrium

D) Fisher effect

Answer: A

Topic: Chapter 4.A1 Models of Asset Pricing

Question Status: Previous Edition

86) As expected inflation increases for the coming year, we expected the price of gold to ________ due to a rightward shift the in ________ curve.

A) increase; demand

B) increase; supply

C) decrease; demand

D) decrease; supply

Answer: A

Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold

Question Status: New Question

87) As expected inflation falls for the coming year, we expected the price of gold to ________ due to a leftward shift the in ________ curve.

A) increase; demand

B) increase; supply

C) decrease; demand

D) decrease; supply

Answer: C

Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold

Question Status: New Question

4.2  True/False

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

Answer: FALSE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

2) When an economy grows out of a recession, normally the demand for bonds increases and the supply of bonds increases.

Answer: TRUE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

3) When the federal government’s budget deficit decreases, the demand curve for bonds shifts to the right.

Answer: FALSE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

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

Answer: TRUE

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

5) A person who is risk averse prefers to hold assets that are more, not less, risky.

Answer: FALSE

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

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

Answer: TRUE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

7) When income and wealth are rising, the demand for bonds rises and the demand curve shifts to the right.

Answer: TRUE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

8) An increase in the inflation rate will cause the demand curve for bonds to shift to the right.

Answer: FALSE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

9) The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on bonds.

Answer: FALSE

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

10) An increase in the federal government budget deficit will raise the interest rate on bonds.

Answer: TRUE

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

11) Holding everything else constant, an increase in wealth lowers the quantity demanded of an asset.

Answer: FALSE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

12) 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.

Answer: TRUE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

13) The more liquid an asset is relative to alternative assets, holding everything else unchanged, the more desirable it is, and the greater the quantity demanded.

Answer: TRUE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

14) A movement along the demand (or supply) curve occurs when the quantity demanded (or supplied) changes at each given price (or interest rate)of the bond in response to a change in some other factor besides the bond’s price or interest rate.

Answer: FALSE

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

4.3  Essay

1) Identify and explain the four factors that influence asset demand. Which of these factors affect total asset demand and which influence investors to demand one asset over another?

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

2) 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.

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

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

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

4) If investors perceive greater interest rate risk, what will happen to the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework.

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

5) How will a decrease in the federal government’s budget deficit affect the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework.

Topic: Chapter 4.3 Changes in Equilibrium Interest Rates

Question Status: Previous Edition

6) What is the expected return on a bond if the return is 9% two-thirds of the time and 3% one-third of the time? What is the standard deviation of the returns on this bond? Would you prefer this bond or one with an identical expected return and a standard deviation of 4.5? Why?

Topic: Chapter 4.1 Determining Asset Demand

Question Status: Previous Edition

7) Identify and describe three factors that cause the supply curve for bonds to shift.

Topic: Chapter 4.2 Supply and Demand in the Bond Market

Question Status: Previous Edition

8) 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.

Topic: Chapter 4.A1 Models of Asset Pricing

Question Status: New Question

9) What is the difference between systematic and nonsystematic risk?

Topic: Chapter 4.A1 Models of Asset Pricing

Question Status: New Question

10) Explain the difference between the Capital Asset Pricing Model and the Arbitrage Pricing Theory.

Topic: Chapter 4.A1 Models of Asset Pricing

Question Status: New Question

11) Explain how the price of gold should be positively related to expected inflation.

Topic: Chapter 4.A2 Applying the Asset Approach to a Commodity Market: The Case of Gold

Question Status: New Question

12) Explain how the loanable funds framework and the supply and demand for bonds are related.

Topic: Chapter 4.A3 Loanable Funds Framework

Question Status: New Question

13) Describe the factors that shift the demand and supply of money in the loanable funds framework.

Topic: Chapter 4.A3 Loanable Funds Framework

Question Status: New Question

14) Explain the differences between the loanable funds framework and the liquidity preference framework.

Topic: Chapter 4.A4 Supply and Demand in the Market for Money: The Liquidity Preference Framework

Question Status: New Question