Q&A Hero

Q: Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the A) income effect. B) liquidity effect. C) price level effect. D) expected inflation effect.

Q: Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect. A) liquidity B) price level C) expected-inflation D) income

Q: ________ in the money supply creates excess demand for ________, causing interest rates to ________, everything else held constant. A) An increase; money; rise B) An increase; bonds; fall C) A decrease; bonds; rise D) A decrease; money; fall

Q: ________ in the money supply creates excess ________ money, causing interest rates to ________, everything else held constant. A) A decrease; demand for; rise B) An increase; demand for; fall C) An increase; supply of; rise D) A decrease; supply of; fall

Q: When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A) decreases; right; rises B) increases; right; falls C) decreases; left; falls D) increases; left; rises

Q: When the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A) right; rises B) right; falls C) left; falls D) left; rises

Q: A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A) decrease; right B) decrease; left C) increase; right D) increase; left

Q: When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; decreases; fall B) demand; increases; rise C) supply; increases; rise D) supply; decreases; fall

Q: A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

Q: When the price level ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; left; falls B) rises; right; falls C) falls; left; rises D) rises; right; rises

Q: In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right

Q: A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Q: When real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; right; rises B) rises; right; rises C) falls; left; rises D) rises; left; rises

Q: A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

Q: In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant. A) shift right B) shift left C) stay where it is D) invert

Q: In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise

Q: When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise

Q: If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________. A) sell; rise B) sell; fall C) buy; rise D) buy; fall

Q: If there is an excess supply of money A) individuals sell bonds, causing the interest rate to rise. B) individuals sell bonds, causing the interest rate to fall. C) individuals buy bonds, causing interest rates to fall. D) individuals buy bonds, causing interest rates to rise.

Q: An increase in the interest rate A) increases the demand for money. B) increases the quantity of money demanded. C) decreases the demand for money. D) decreases the quantity of money demanded.

Q: The opportunity cost of holding money is A) the level of income. B) the price level. C) the interest rate. D) the discount rate.

Q: In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall. A) falls; bonds B) falls; money C) rises; bonds D) rises; money

Q: In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus, A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.

Q: Keynes assumed that money has ________ rate of return. A) a positive B) a negative C) a zero D) an increasing

Q: The bond supply and demand 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) government budget deficits; money

Q: In Keynes's liquidity preference framework, if there is excess demand for money, there is A) an excess demand for bonds. B) equilibrium in the bond market. C) an excess supply of bonds. D) too much money.

Q: In Keynes's liquidity preference framework, A) the demand for bonds must equal the supply of money. B) the demand for money must equal the supply of bonds. C) an excess demand of bonds implies an excess demand for money. D) an excess supply of bonds implies an excess demand for money.

Q: 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.

Q: Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall.

Q: What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public?

Q: If real estate prices are expected to drop, all else equal, the demand for bonds ________ and the interest rate_______. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls

Q: If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases

Q: If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________. A) decreases; decreases; increases B) decreases; decreases; decreases C) increases; decreases; increases D) increases; increases; increases

Q: If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________. A) left; rise B) left; fall C) right; rise D) right; fall

Q: If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________. A) demand; left; rises B) demand; right; rises C) demand; left; falls D) supply; left; rises

Q: Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the supply curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate rises.

Q: Everything else held constant, when real estate prices are expected to decrease A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the demand curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate falls.

Q: Everything else held constant, when prices in the art market become more uncertain, A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the demand curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate falls.

Q: An asset's interest rate risk ________ as the duration of the asset ________. A) increases; decreases B) decreases; decreases C) decreases; increases D) remains constant; increases

Q: If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio? A) 12 years B) 7 years C) 6 years D) 5 years

Q: All else equal, the ________ the coupon rate on a bond, the ________ the bond's duration. A) higher; longer B) higher; shorter C) lower; shorter D) greater; longer

Q: All else equal, when interest rates ________, the duration of a coupon bond ________. A) rise; falls B) rise; increases C) falls; falls D) falls; does not change

Q: The duration of a coupon bond increases A) the longer is the bond's term to maturity. B) when interest rates increase. C) the higher the coupon rate on the bond. D) the higher the bond price.

Q: Comparing a discount bond and a coupon bond with the same maturity, A) the coupon bond has the greater effective maturity. B) the discount bond has the greater effective maturity. C) the effective maturity cannot be calculated for a coupon bond. D) the effective maturity cannot be calculated for a discount bond.

Q: Duration is A) an asset's term to maturity. B) the time until the next interest payment for a coupon bond. C) the average lifetime of a debt security's stream of payments. D) the time between interest payments for a coupon bond.

Q: Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer.

Q: Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Protected Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is A) 3 percent. B) 5 percent. C) 8 percent. D) 11 percent.

Q: Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into A) the nominal interest rate. B) the real interest rate. C) the nominal exchange rate. D) the expected inflation rate.

Q: The interest rate on Treasury Inflation Protected Securities is a direct measure of A) the real interest rate. B) the nominal interest rate. C) the rate of inflation. D) the rate of deflation.

Q: In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was A) irrelevant. B) low. C) negative. D) high.

Q: If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -3 percent. B) -2 percent. C) 3 percent. D) 7 percent.

Q: If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -5 percent. B) -2 percent. C) 2 percent. D) 12 percent.

Q: If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent.

Q: In which of the following situations would you prefer to be the borrower? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

Q: In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

Q: If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent.

Q: The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. A) Fisher equation B) Keynesian equation C) Monetarist equation D) Marshall equation

Q: The interest rate that describes how well a lender has done in real terms after the fact is called the A) ex post real interest rate. B) ex ante real interest rate. C) ex post nominal interest rate. D) ex ante nominal interest rate.

Q: When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) nominal; lend; borrow B) real; lend; borrow C) real; borrow; lend D) market; lend; borrow

Q: The nominal interest rate minus the expected rate of inflation A) defines the real interest rate. B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. C) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. D) defines the discount rate.

Q: The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market

Q: The ________ interest rate is adjusted for expected changes in the price level. A) ex ante real B) ex post real C) ex post nominal D) ex ante nominal

Q: Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%. Should you follow his advice?

Q: There is ________ for any bond whose time to maturity matches the holding period. A) no interest-rate risk B) a large interest-rate risk C) rate-of-return risk D) yield-to-maturity risk

Q: Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. A) long-term; long-term B) long-term; short-term C) short-term; long-term D) short-term; short-term

Q: Interest-rate risk is the riskiness of an asset's returns due to A) interest-rate changes. B) changes in the coupon rate. C) default of the borrower. D) changes in the asset's maturity.

Q: The riskiness of an asset's returns due to changes in interest rates is A) exchange-rate risk. B) price risk. C) asset risk. D) interest-rate risk.

Q: Which of the following are generally true of all bonds? A) The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C) Prices and returns for short-term bonds are more volatile than those for longer term bonds. D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period.

Q: Which of the following are generally true of bonds? A) The only bond whose return equals the initial yield to maturity is one whose time to maturity is the same as the holding period. B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds.

Q: An equal increase in all bond interest rates A) increases the return to all bond maturities by an equal amount. B) decreases the return to all bond maturities by an equal amount. C) has no effect on the returns to bonds. D) decreases long-term bond returns more than short-term bond returns.

Q: An equal decrease in all bond interest rates A) increases the price of a five-year bond more than the price of a ten-year bond. B) increases the price of a ten-year bond more than the price of a five-year bond. C) decreases the price of a five-year bond more than the price of a ten-year bond. D) decreases the price of a ten-year bond more than the price of a five-year bond.

Q: If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) A bond with one year to maturity B) A bond with five years to maturity C) A bond with ten years to maturity D) A bond with twenty years to maturity

Q: When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is A) 10 percent. B) 8 percent. C) 12 percent. D) there is not enough information to determine the return.

Q: Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding? A) 5 percent B) 10 percent C) 15 percent D) 20 percent

Q: The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is A) -10 percent. B) -5 percent. C) 0 percent. D) 5 percent.

Q: What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? A) 5 percent B) 10 percent C) -5 percent D) -10 percent

Q: What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? A) 5 percent B) 10 percent C) -5 percent D) 25 percent

Q: The sum of the current yield and the rate of capital gain is called the A) rate of return. B) discount yield. C) pertuity yield. D) par value.

Q: Which of the following are true concerning the distinction between interest rates and returns? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the difference between the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls between time t and time t + 1. D) The return can be expressed as the sum of the discount yield and the rate of capital gains.

Q: The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price. A) yield to maturity B) current yield C) rate of return D) yield rate