Chapter 4 Why Do Interest Rates Change? 4.1 Multiple Choice 4.1.

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 Question Status: Previous Edition 4.1.2) 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 Question Status: Previous Edition 4.1.3) 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 Question Status: Previous Edition 4.1.4) 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 Question Status: Previous Edition 4.1.5) 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 Question Status: Previous Edition 40 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition 4.1.6) 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 Question Status: Previous Edition 4.1.7) 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 Question Status: Previous Edition 4.1.8) 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 Question Status: Previous Edition 4.1.9) 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 Question Status: Previous Edition 4.1.10) 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 Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 41

decreases D) decreases. A) increases.1. A) increases. interest rates fall. increases Answer: D Question Status: Previous Edition 4.15) Factors that determine the demand for an asset include changes in the A) wealth of investors. D) risk of bonds relative to alternative assets. decreases D) increases. increases Answer: A Question Status: Previous Edition 4.13) When the demand for bonds _________ or the supply of bonds _________. increases B) increases. A) increases. B) liquidity of bonds relative to alternative assets. increases B) increases. decreases C) decreases. bond prices fall.1. decreases D) decreases.1. C) expected returns on bonds relative to alternative assets. increases Answer: B Question Status: Previous Edition 4. bond prices rise.12) When the demand for bonds _________ or the supply of bonds _________.4. increases B) increases. E) all of the above. A) increases. increases Answer: D Question Status: Previous Edition 4. interest rate rise. A) risk relative to other assets B) expected return relative to other assets C) liquidity relative to other assets D) wealth Answer: A .11) When the demand for bonds _________ or the supply of bonds _________.14) When the demand for bonds _________ or the supply of bonds _________. decreases D) decreases.1. Answer: E Question Status: Previous Edition 4. decreases B) decreases. decreases C) decreases.16) The demand for an asset rises if _________ falls.1.1. decreases C) decreases. increases C) decreases.

and _________ the higher is the price of the consol next year. D) increasing liquidity. left Answer: B Question Status: Previous Edition 4. right B) falls.19) In a recession when income and wealth are falling.1. A) greater. B) increasing expected return.20) During business cycle expansions when income and wealth are rising.1.Question Status: Previous Edition 42 Mishkin/Eakins · Financial Markets and Institutions. left Answer: C Question Status: Previous Edition 4. lower C) lower. higher B) higher. higher D) lower.1. left C) rises. Answer: C Question Status: Previous Edition 4. the demand for bonds _________ and the demand curve shifts to the _________. the _________ is the asset s _________. C) reducing risk. left C) rises. the expected return on a consol is _________ the higher is the price of the consol today.1. risk B) smaller. A) falls. risk C) greater. lower Answer: C Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 43 . right B) falls. right D) rises.21) For a holding period of one year. right D) rises.18) Diversification benefits an investor by A) increasing wealth.17) The higher the standard deviation of returns on an asset. A) higher. the demand for bonds _________ and the demand curve shifts to the _________. Sixth Edition 4. expected return Answer: A Question Status: Previous Edition 4. A) falls.1. expected return D) smaller.

1.1.22) Higher expected interest rates in the future _________ the demand for long-term bonds and shift the demand curve to the _________. financial. supply Answer: B Question Status: Previous Edition 44 Mishkin/Eakins · Financial Markets and Institutions. A) increase. real. rises B) right.1. right Answer: C Question Status: Previous Edition 4. demand B) reduce. falls C) left. left. the demand curve for bonds shifts to the _________ and the interest rate _________. Sixth Edition 4. falls D) left.1. left D) decrease. right. the demand curve for bonds shifts to the _________ and the interest rate _________. rises C) left. right C) decrease. A) reduce. right.4. Answer: B Question Status: Previous Edition 4. real.25) When people begin to expect a large run up in stock prices. rises Answer: D Question Status: Previous Edition 4. C) decrease. B) increase.27) A decrease in the expected rate of inflation will _________ the expected return on bonds .23) Lower expected interest rates in the future _________ the demand for long -term bonds and shift the demand curve to the _________ A) increase.1. D) decrease. falls D) left. A) right. financial. falls B) right. and shift the _________ curve to the left. A) right.24) When people begin to expect a large stock market decline. supply D) raise. demand C) raise. left.26) An increase in the expected rate of inflation will _________ the expected return on bonds relative to that on _________ assets.1. left B) increase. rises Answer: A Question Status: Previous Edition 4.

1. falls D) decreases. financial D) raise. the demand for bonds _________ and the interest rate _________.28) When the expected inflation rate increases. financial B) reduce. A) increases.31) When bond interest rates become less volatile. the supply of bonds _________. rises Answer: D Question Status: Previous Edition 4.1. . decreases. rises Answer: D Question Status: Previous Edition 4. rises B) decreases. falls D) decreases. the demand for bonds _________ and the interest rate _________. falls C) decreases. and the interest rate _________. real C) raise. A) increases. falls C) decreases.1. and the interest rate _________.29) When the expected inflation rate decreases. increases.relative to that on _________ assets. the demand for bonds _________. the demand curve for bonds shifts to the _________ and the interest rate _________. A) reduce. rises Answer: B Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 45 4. A) increases. increases. decreases. rises Answer: C Question Status: Previous Edition 4. the demand for bonds _________.32) When prices in the stock market become more uncertain. falls C) increases. increases. increases.1. A) increases. falls C) increases.1. decreases. rises B) increases. real Answer: D Question Status: Previous Edition 4. falls D) decreases. decreases. falls D) decreases. rises B) decreases. rises B) increases. the supply of bonds _________.30) When bond interest rates become more volatile.

A) right. falls D) left. falls C) left. . B) an increase in the volatility of stock prices. and as a consequence the market becomes less liquid. falls D) left.34) When bonds become more widely traded. falls D) left. falls D) left. A) right. and as a consequence the market becomes more liquid.37) Factors that cause the demand curve for bonds to shift to the left include A) a decrease in the inflation rate. rises B) right.35) When bonds become less widely traded. Answer: D Question Status: Previous Edition 46 Mishkin/Eakins · Financial Markets and Institutions. falls C) left. the demand curve for bonds shifts to the _________ and the interest rate _________. rises B) right. rises Answer: D Question Status: Previous Edition 4.1. C) a decrease in the volatility of stock prices.1. A) right.33) When stock prices become less volatile. Sixth Edition 4. rises B) right. rises Answer: B Question Status: Previous Edition 4.1. B) an increase in the liquidity of stocks.36) Factors that cause the demand curve for bonds to shift to the left include A) an increase in the inflation rate. D) all of the above. E) none of the above. A) right. rises Answer: B Question Status: Previous Edition 4. rises B) right. the demand curve for bonds shifts to the _________ and the interest rate _________. C) an increase in the liquidity of stocks. rises Answer: D Question Status: Previous Edition 4. falls C) left.1.1. the demand curve for bonds shifts to the _________ and the interest rate _________. falls C) left.

A) demand.42) When the federal government s budget deficit decreases. right C) decrease. right Answer: B Question Status: Previous Edition 4. Answer: C Question Status: Previous Edition 4. left B) increase. left D) supply. left C) supply.40) An increase in expected inflation causes the supply of bonds to _________ and the supply curve to shift to the _________. left C) supply.39) During a recession. right Answer: C Question Status: Previous Edition 4. E) only A and B of the above. left .1. right B) demand. the _________ curve for bonds shifts to the _________.1.38) During an economic expansion.1. left D) decreases.41) When the federal government s budget deficit increases. right Answer: B Question Status: Previous Edition 4. A) increases. right B) demand.D) all of the above. A) demand. right C) decreases. right Answer: D Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 47 4. left D) decrease. A) increases. the _________ curve for bonds shifts to the _________. right C) decreases. A) increase. the supply of bonds _________ and the supply curve shifts to the _________.1. the supply of bonds _________ and the supply curve shifts to the _________. left B) increases. left D) decreases.1. left B) increases.

1.43) When the inflation rate is expected to increase. demand D) supply of. right Answer: C Question Status: Previous Edition 4. the _________ bonds increases and the _________ curve shifts to the right. as a result. Answer: C Question Status: Previous Edition 4. the expected return on bonds relative to real assets falls for any given interest rate.D) supply. demand B) demand for. expected inflation rate B) decrease. supply Answer: A Question Status: Previous Edition 4.1. Sixth Edition Figure 4. supply C) supply of. the real cost of borrowing declines at any given interest rate. D) a decrease in the expected inflation rate. the _________ bonds falls and the _________ curve shifts to the left. C) an increase in the expected inflation rate. supply C) supply of.46) In Figure 4. expected inflation rate C) increase. demand B) demand for.45) In Figure 4.1. B) a business cycle boom. A) demand for. demand D) supply of.1. 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.44) When the inflation rate is expected to increase. government budget deficit D) decrease.1.1.1. government budget deficit Answer: A Question Status: Previous Edition 4.1. as a result. supply Answer: D Question Status: Previous Edition 48 Mishkin/Eakins · Financial Markets and Institutions. A) increase.47) In Figure 4. .1 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. the most likely cause of the increase in the equilibrium interest rate from i1 to i2 is a(n) _________ in the _________. A) demand for.

Answer: B Question Status: Previous Edition 4. rise C) rise.52) A decrease in the expected rate of inflation causes the demand for bonds to _________ and the supply of bonds to _________. fall D) rise. E) only A and B of the above.1. D) a combination of both A and C of the above.49) Factors that can cause the supply curve for bonds to shift to the left include A) an expansion in overall economic activity. fall B) fall. D) all of the above.B) a decrease in the expected inflation rate. C) a business cycle expansion. stabilizes C) rise. explained why interest rates _________ as the expected rate of inflation _________. increases E) fall. A) rise.1. increases B) rise. fall . A) fall.51) An increase in the expected rate of inflation causes the demand for bonds to _________ and the supply for bonds to _________. Answer: A Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 49 4. after whom the Fisher effect is named. rise C) rise. stabilizes Answer: A Question Status: Previous Edition 4. D) only A and C of the above. decreases D) fall. B) a decrease in expected inflation. B) a decrease in expected inflation. Answer: B Question Status: Previous Edition 4. fall B) fall. A) fall. C) a decrease in government deficits. rise Answer: B Question Status: Previous Edition 4.1. C) an increase in government deficits.50) The economist Irving Fisher.1.48) Factors that can cause the supply curve for bonds to shift to the right include A) an expansion in overall economic activity.1.

Sixth Edition 4. rises Answer: A Question Status: Previous Edition Figure 4. rises B) decreases. rises D) decreases. increases. C) a decrease in government budget deficits. decreases. one possible explanation for the increase in the interest rate from i1 to i2 is A) an increase in economic growth. and the interest rate _________.2.57) In Figure 4.1. Answer: C Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 51 . A) increase. normally the demand for bonds _________.1. A) increases.2.55) In Figure 4. the expected inflation rate B) decrease. C) a decrease in economic growth. falls C) increases.53) When the economy slips into a recession.1. decreases. falls C) increases. increases. falls D) decreases. decreases.D) rise. increases. the supply of bonds _________.1. rise Answer: C Question Status: Previous Edition 4. E) a decrease in the riskiness of bonds relative to other investments.2. increases. the supply of bonds _________. rises Answer: B Question Status: Previous Edition 50 Mishkin/Eakins · Financial Markets and Institutions. economic growth D) decrease. and the interest rate _________. Answer: A Question Status: Previous Edition 4. one possible explanation for a decrease in the interest rate from i2to i1 is A) an increase in government budget deficits. A) increases. rises B) decreases. decreases. the expected inflation rate C) increase. D) a decrease in the riskiness of bonds relative to other investments.1.54) When the economy enters into a boom. B) an increase in government budget deficits. normally the demand for bonds _________. economic growth Answer: C Question Status: Previous Edition 4. B) an increase in expected inflation. one possible explanation for the increase in the interest rate from i1 to i2 is a(n) _________ in _________.56) In Figure 4.2 4. D) a decrease in economic growth.

rise C) fall. C) increase. increase.1. the price level.62) A higher level of income causes the demand for money to _________ and the interest rate to _________ A) decrease. the price level. which of the following is true? A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation.1.4. causing the demand for money to _________. C) money and bonds. thus. while the liquidity preference framework provides a simpler analysis of the effects from changes in income.58) In Keynes s liquidity preference framework. Answer: C Question Status: Previous Edition 4.60) The loanable funds framework is easier to use when analyzing the effects of changes in _________.1. fall D) fall. Answer: B Question Status: Previous Edition 4. B) expected inflation. A) rise. Keynes assumed that money has a zero rate of return. C) In most instances.59) In his liquidity preference framework. bonds. bonds. when interest rates _________ the expected return on money falls relative to the expected return on bonds. .61) When comparing the loanable funds and liquidity preference frameworks of interest rate determination.1. decrease. money. Answer: C Question Status: Previous Edition 4. fall B) rise. rise Answer: A Question Status: Previous Edition 4. C) government budget deficits. D) the supply of money. D) money and gold. B) stocks and bonds. and the supply of _________ A) expected inflation. B) decrease. and the supply of money. decrease. B) The loanable funds framework provides a simpler analysis of the effects of changes in income.1. E) Only A and B of the above are true. bonds. D) All of the above are true. individuals are assumed to hold their wealth in two forms: A) real assets and financial assets. the two approaches to interest rate determination yield the same predictions.

left. Answer: C Question Status: Previous Edition 4. C) increase. D) increase. B) interest rates to increase initially. C) increase. increase. C) bond prices to decline initially. B) decrease. increase. left.64) A rise in the price level causes the demand for money to _________ and the demand curve to shift to the _________ A) decrease. left. right. D) increase. right.63) A lower level of income causes the demand for money to _________ and the interest rate to _________ A) decrease.D) increase. an increase in the money supply causes A) interest rates to decline initially. B) decrease. D) increase.1. right. C) increase. E) both B and C of the above. Sixth Edition 4. C) increase. right. decrease.65) A decline in the price level causes the demand for money to _________ and the demand curve to shift to the _________ A) decrease.1. Answer: B Question Status: Previous Edition 4. left. left. right.67) Holding everything else constant.1. Answer: B Question Status: Previous Edition 4.1. D) both A and C of the above.1. right. decrease. . left. Answer: A Question Status: Previous Edition 4. Answer: D Question Status: Previous Edition 52 Mishkin/Eakins · Financial Markets and Institutions. B) decrease. B) decrease.66) A decline in the expected inflation rate causes the demand for money to _________ and the demand curve to shift to the _________ A) decrease. D) increase. increase.

a decrease in the money supply causes A) interest rates to decline initially.72) Of the four effects on interest rates from an increase in the money supply.1. Answer: B Question Status: Previous Edition Figure 4. E) both B and C of the above. C) a decline in the price level. C) an increase in the money supply.1.3 4.1. the initial effect is.1. Sixth Edition 4. the factor responsible for the decline in the interest rate is A) a decline in the price level. the . D) a decline in the expected inflation rate.1. the one that works in the opposite direction of the other three is the A) liquidity effect. generally. B) income effect.3. Answer: A Question Status: Previous Edition 4. D) both A and C of the above. Answer: B Question Status: Previous Edition 54 Mishkin/Eakins · Financial Markets and Institutions. D) expected inflation effect. the decrease in the interest rate from i1 to i2 can be explained by A) a decrease in money growth.Answer: A Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 53 4. B) a decline in income.71) In Figure 4. B) an increase in money growth. Answer: C Question Status: Previous Edition 4.3. C) bond prices to increase initially.68) Holding everything else constant. an increase in the interest rate from i2 to i1 can be explained by A) a decrease in money growth. B) interest rates to increase initially.70) In Figure 4.69) In Figure 4.1. Answer: A Question Status: Previous Edition 4. C) price level effect. C) a decline in the expected price level. D) only A and B of the above.73) Of the four effects on interest rates from an increase in the money supply. D) an increase in the expected price level.3. B) an increase in money growth.

D) the expected inflation effect is larger than the liquidity effect. Answer: A Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 55 4.77) 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. rapid B) larger. rapid Answer: B Question Status: Previous Edition . B) there is fast adjustment of expected inflation. interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects.76) 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. Answer: C Question Status: Previous Edition 4. C) there is slow adjustment of expected inflation. slow D) smaller.74) If the liquidity effect is smaller than the other effects. D) expected inflation effect. D) the expected inflation effect is larger than the liquidity effect. A) larger. C) price level effect. D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth. B) there is fast adjustment of expected inflation. Answer: B Question Status: Previous Edition 4.A) income effect. and the adjustment of expected inflation is slow. C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. slow C) smaller.1. Answer: D Question Status: Previous Edition 4.75) When the growth rate of the money supply increases.1.1. C) there is slow adjustment of expected inflation. B) liquidity effect. then the A) interest rate will fall.1. B) interest rate will rise.

risk C) rise. D) the liquidity effect is larger than the other effects.80) If the Fed wants to permanently lower interest rates. B) there is slow adjustment of expected inflation. liquidity B) fall. C) the liquidity effect is smaller than the expected inflation effect. Sixth Edition 4. A) larger.79) If the Fed wants to permanently lower interest rates. quickly .78) When the growth rate of the money supply is increased. and expected inflation. quickly B) larger. liquidity D) rise.82) Figure 4.4 4. C) the liquidity effect is smaller than the expected inflation effect. B) there is slow adjustment of expected inflation. A) smaller.4 illustrates the effect of an increased rate of money supply growth.81) Milton Friedman contends that it is entirely possible that when the money supply rises. interest rates will rise immediately if the liquidity effect is _________ than the other effects and if there is _________ adjustment of expected inflation. the price level. From the figure.1.1. Answer: C Question Status: Previous Edition 4.1.4. rapid Answer: D Question Status: Previous Edition 4. slow D) smaller. then it should raise the rate of money growth if A) there is fast adjustment of expected inflation. rapid B) larger. D) the liquidity effect is larger than the other effects. one can conclude that the liquidity effect is _________ than the expected inflation effect and interest rates adjust _________ to changes in expected inflation.1. A) fall. risk Answer: C Question Status: Previous Edition Figure 4. slow C) smaller.1. interest rates may _________ if the _________ effect is more than offset by changes in income. then it should lower the rate of money growth if A) there is fast adjustment of expected inflation. Answer: D Question Status: Previous Edition 56 Mishkin/Eakins · Financial Markets and Institutions.

quickly C) larger.1.4 illustrates the effect of an increased rate of money supply growth. one can conclude that the liquidity effect is _________ than the expected inflation effect and interest rates adjust _________ to changes in expected inflation.84) Figure 4.5 illustrates the effect of an increased rate of money supply growth. slowly Answer: A Question Status: Previous Edition 4. slowly Answer: C Question Status: Previous Edition 4. including all assets. From the figure. slowly D) smaller.83) Figure 4.1. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. 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.85) Figure 4. A) Expected return B) Wealth C) Liquidity . Answer: A Question Status: Previous Edition 4. 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.C) larger.1.86) _______ is the total resources owned by the individual.5 4. slowly D) smaller.5 illustrates the effect of an increased rate of money supply growth. From the figure. quickly B) larger. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. A) smaller. 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. Answer: C Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 57 Figure 4.1.

B) expected return.2 True/False 4. C) asset market approach. Answer: C Question Status: New 4.D) Risk Answer: B Question Status: New 58 Mishkin/Eakins · Financial Markets and Institutions. Sixth Edition 4.1. normally the demand for bonds increases and the supply of bonds increases.1.2.2. the demand curve for bonds shifts to the right.2) When an economy grows out of a recession. A) risk preferrer B) risk-averse person C) risk lover D) risk-favorable person Answer: B Question Status: New 4.1) When interest rates decrease.87) A ________ prefers stock in the less risky asset than in the riskier asset. the demand curve for bonds shifts to the left.88) When the quantity of bonds demanded equals the quantity of bonds supplied there is A) excess supply. Answer: C Question Status: New 4. D) asset market approach. Answer: FALSE Question Status: Previous Edition 4.89) Determining asset prices using stocks of assets rather than flow is called A) asset transformation.90) 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 Question Status: New 4. Answer: TRUE Question Status: Previous Edition 4.1.2. D) market equilibrium.3) When the federal government s budget deficit decreases. Answer: FALSE .1. B) excess demand. C) market equilibrium.

2. an increase in wealth lowers the quantity demanded of an asset.2. Answer: TRUE Question Status: Previous Edition 4. Answer: FALSE Question Status: Previous Edition 4. Answer: TRUE Question Status: New 4. not less.6) Interest rates are procyclical in that they tend to rise during business cycle expansions and fall during recessions.5) A person who is risk averse prefers to hold assets that are more.2. Answer: TRUE Question Status: Previous Edition 4. liquidity. raises the quantity demanded of the asset. holding everthing else unchanged.8) An increase in the inflation rate will cause the demand curve for bonds to shift to the right.2. Sixth Edition 4. and the greater will be the quantity demanded.14) A movement along the demand (or supply) curve occurs when the quantity demanded (or .2. the more desirable it is.7) When income and wealth are rising.9) The Fisher Effect predicts that an incease in expected inflation will lower the interest rate on bonds.4) Investors make their choices of which assets to hold by comparing the expected return.2.2. Answer: TRUE Question Status: Previous Edition 4. Answer: TRUE Question Status: Previous Edition 4.2. holding everything else unchanged.10) An increase in the federal government budget deficit will raise the interest rate on bonds.11) Holding everything else constant. Answer: FALSE Question Status: New 4. and risk of alternative assets. the demand for bonds rises and the demand curve shifts to the right.2. Answer: TRUE Question Status: New 60 Mishkin/Eakins · Financial Markets and Institutions.Question Status: Previous Edition Chapter 4 Why Do Interest Rates Change? 59 4. Answer: FALSE Question Status: Previous Edition 4. risky.12) An increase in an asset s expected return relative to that of an alternative asset.2.13) The more liquid an asset is relative to alternative assets.2. Answer: FALSE Question Status: Previous Edition 4.

3.5) 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. Question Status: Previous Edition 4.4) If investors perceive greater interest rate risk.5? Why? Question Status: Previous Edition 4.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.3.3.3.6) 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 4.2) 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.3. Question Status: Previous Edition 4. Question Status: Previous Edition 4.1) Identify and explain the four factors that influence asset demand. Answer: FALSE Question Status: New 4.3) Use the bond demand and supply framework to explain the Fisher effect and why it occurs. Which of these factors affect total asset demand and which influence investors to demand one asset over another? Question Status: Previous Edition 4.3. what will happen to the equilibrium interest rate in the bond market? Explain using the bond demand and supply framework.3. Question Status: New . Question Status: Previous Edition 4.3 Essay 4.7) Identify and describe three factors that cause the supply curve for bonds to shift.

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