Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 5 The Behavior of Interest Rates
5.1 Determinants of Asset Demand
1) Pieces of property that serve as a store of value are called
A) assets.
B) units of account.
C) liabilities.
D) borrowings.
2) Of the four factors that influence asset demand, which factor will cause the demand for all
assets to increase when it increases, everything else held constant?
A) wealth
B) expected returns
C) risk
D) liquidity
3) If wealth increases, the demand for stocks ________ and that of long-term bonds ________,
everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
4) Everything else held constant, a decrease in wealth
A) increases the demand for stocks.
B) increases the demand for bonds.
C) reduces the demand for silver.
D) increases the demand for gold.
5) An increase in an asset’s expected return relative to that of an alternative asset, holding
everything else constant, ________ the quantity demanded of the asset.
A) increases
B) decreases
C) has no effect on
D) erases
6) Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent
and the expected return on CBS stock is unchanged, then the expected return of holding CBS
stock ________ relative to ABC stock and the demand for CBS stock ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
7) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5
percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of
holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock
________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
8) If housing prices are expected to increase, then, other things equal, the demand for houses will
________ and that of Treasury bills will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
9) If stock prices are expected to drop dramatically, then, other things equal, the demand for
stocks will ________ and that of Treasury bills will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
10) Everything else held constant, if the expected return on RST stock declines from 12 to 9
percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected
return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock
________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
11) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7
percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected
return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for
corporate bonds ________.
A) rises; rises
B) rises; falls
C) falls; rises
D) falls; falls
12) An increase in the expected rate of inflation will ________ the expected return on bonds
relative to the that on ________ assets, everything else held constant.
A) reduce; financial
B) reduce; real
C) raise; financial
D) raise; real
13) If fluctuations in interest rates become smaller, then, other things equal, the demand for
stocks ________ and the demand for long-term bonds ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
14) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will
________ and the demand for antiques will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
15) If brokerage commissions on bond sales decrease, then, other things equal, the demand for
bonds will ________ and the demand for real estate will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
16) If gold becomes acceptable as a medium of exchange, the demand for gold will ________
and the demand for bonds will ________, everything else held constant.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
17) The demand for Picasso paintings rises (holding everything else equal) when
A) stocks become easier to sell.
B) people expect a boom in real estate prices.
C) Treasury securities become riskier.
D) people expect gold prices to rise.
18) The demand for silver decreases, other things equal, when
A) the gold market is expected to boom.
B) the market for silver becomes more liquid.
C) wealth grows rapidly.
D) interest rates are expected to rise.
19) You would be less willing to purchase U.S. Treasury bonds, other things equal, if
A) you inherit $1 million from your Uncle Harry.
B) you expect interest rates to fall.
C) gold becomes more liquid.
D) stock prices are expected to fall.
20) You would be more willing to buy AT&T bonds (holding everything else constant) if
A) the brokerage commissions on bond sales become cheaper.
B) interest rates are expected to rise.
C) your wealth has decreased.
D) you expect diamonds to appreciate in value.
21) The demand for gold increases, other things equal, when
A) the market for silver becomes more liquid.
B) interest rates are expected to rise.
C) interest rates are expected to fall.
D) real estate prices are expected to increase.
22) The demand for houses decreases, all else equal, when
A) wealth increases.
B) real estate prices are expected to increase.
C) stock prices become more volatile.
D) gold prices are expected to increase.
23) Holding everything else constant
A) if asset A’s risk rises relative to that of alternative assets, the demand will increase for asset A.
B) the more liquid is asset A, relative to alternative assets, the greater will be the demand for
asset A.
C) the lower the expected return to asset A relative to alternative assets, the greater will be the
demand for asset A.
D) if wealth increases, demand for asset A increases and demand for alternative assets decreases.
24) Holding all other factors constant, the quantity demanded of an asset is
A) positively related to wealth.
B) negatively related to its expected return relative to alternative assets.
C) positively related to the risk of its returns relative to alternative assets.
D) negatively related to its liquidity relative to alternative assets.
25) If the price of diamonds is expected to decrease, all else equal, then the demand for
diamonds ________ and the demand for platinum ________.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
26) If prices in the diamond market become less volatile, all else equal, then the demand for
diamonds ________ and the demand for gold ________.
A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases
27) Everything else held constant, would an increase in volatility of stock prices have any impact
on the demand for rare coins? Why or why not?
5.2 Supply and Demand in the Bond Market
1) In the bond market, the bond demanders are the ________ and the bond suppliers are the
________.
A) lenders; borrowers
B) lenders; advancers
C) borrowers; lenders
D) borrowers; advancers
2) The demand curve for bonds has the usual downward slope, indicating that at ________ prices
of the bond, everything else equal, the ________ is higher.
A) higher; demand
B) higher; quantity demanded
C) lower; demand
D) lower; quantity demanded
3) The bond demand curve is ________ sloping, indicating a(n) ________ relationship between
the price and quantity demanded of bonds, everything else equal.
A) downward; inverse
B) downward; direct
C) upward; inverse
D) upward; direct
4) 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
5) The bond supply curve is ________ sloping, indicating a(n) ________ relationship between
the price and quantity supplied of bonds, everything else equal.
A) downward; inverse
B) downward; direct
C) upward; inverse
D) upward; direct
6) In the bond market, the market equilibrium shows the market-clearing ________ and market-
clearing ________.
A) price; deposit
B) interest rate; deposit
C) price; interest rate
D) interest rate; premium
7) When the price of a bond is above the equilibrium price, there is an excess ________ bonds
and price will ________.
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
8) When the price of a bond is ________ the equilibrium price, there is an excess demand for
bonds and price will ________.
A) above; rise
B) above; fall
C) below; fall
D) below; rise
9) When the interest rate on a bond is above the equilibrium interest rate, in the bond market
there is excess ________ and the interest rate will ________.
A) demand; rise
B) demand; fall
C) supply; fall
D) supply; rise
10) When the interest rate on a bond is ________ the equilibrium interest rate, in the bond
market there is excess ________ and the interest rate will ________.
A) above; demand; rise
B) above; demand; fall
C) below; supply; fall
D) above; supply; rise
11) A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded
is called a condition of excess supply; because people want to sell ________ bonds than others
want to buy, the price of bonds will ________.
A) fewer; fall
B) fewer; rise
C) more; fall
D) more; rise
12) If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded
exceeds the quantity of bonds supplied, a condition called excess ________.
A) above; demand
B) above; supply
C) below; demand
D) below; supply
13) If the interest rate on a bond is above the equilibrium interest rate, there is an excess
________ for bonds and the bond price will ________.
A) demand; rise
B) demand; fall
C) supply; rise
D) supply; fall
14) If the interest rate on a bond is below the equilibrium interest rate, there is an excess
________ of bonds and the bond price will ________.
A) demand; rise
B) demand; fall
C) supply; rise
D) supply; fall
5.3 Changes in Equilibrium Interest Rates
1) A movement along the bond demand or supply curve occurs when ________ changes.
A) bond price
B) income
C) wealth
D) expected return
2) When the price of a bond decreases, all else equal, the bond demand curve
A) shifts right.
B) shifts left.
C) does not shift.
D) inverts.
3) During business cycle expansions when income and wealth are rising, the demand for bonds
________ and the demand curve shifts to the ________, everything else held constant.
A) falls; right
B) falls; left
C) rises; right
D) rises; left
4) Everything else held constant, when households save less, wealth and the demand for bonds
________ and the bond demand curve shifts ________.
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left
5) Everything else held constant, if interest rates are expected to fall in the future, the demand for
long-term bonds today ________ and the demand curve shifts to the ________.
A) rises; right
B) rises; left
C) falls; right
D) falls; left
6) Holding everything else constant, if interest rates are expected to increase, the demand for
bonds ________ and the demand curve shifts ________.
A) increases; right
B) decreases; right
C) increases; left
D) decreases; left
7) Holding the expected return on bonds constant, an increase in the expected return on common
stocks would ________ the demand for bonds, shifting the demand curve to the ________.
A) decrease; left
B) decrease; right
C) increase; left
D) increase; right
8) Everything else held constant, an increase in expected inflation, lowers the expected return on
________ compared to ________ assets.
A) bonds; financial
B) bonds; real
C) real estate; financial
D) real estate; real
9) Everything else held constant, an increase in the riskiness of bonds relative to alternative
assets causes the demand for bonds to ________ and the demand curve to shift to the ________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
10) Everything else held constant, 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
11) Everything else held constant, when stock prices become ________ volatile, the demand
curve for bonds shifts to the ________ and the interest rate ________.
A) more; right; rises
B) more; right; falls
C) less; left; falls
D) less; left; does not change
12) Everything else held constant, an increase in the liquidity of bonds results in a ________ in
demand for bonds and the demand curve shifts to the ________.
A) rise; right
B) rise; left
C) fall; right
D) fall; left
13) Everything else held constant, 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
14) The reduction of brokerage commissions for trading common stocks that occurred in 1975
caused the demand for bonds to ________ and the demand curve to shift to the ________.
A) fall; right
B) fall, left
C) rise; right
D) rise; left
15) Factors that decrease the demand for bonds include
A) an increase in the volatility of stock prices.
B) a decrease in the expected returns on stocks.
C) a decrease in the inflation rate.
D) a decrease in the riskiness of stocks.
16) During a recession, the supply of bonds ________ and the supply curve shifts to the
________, everything else held constant.
A) increases; left
B) increases; right
C) decreases; left
D) decreases; right
17) In a business cycle expansion, the ________ of bonds increases and the ________ curve
shifts to the ________ as business investments are expected to be more profitable.
A) supply; supply; right
B) supply; supply; left
C) demand; demand; right
D) demand; demand; left
18) When the expected inflation rate increases, the real cost of borrowing ________ and bond
supply ________, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
19) An increase in the expected inflation rate causes the supply of bonds to ________ and the
supply curve to shift to the ________, everything else held constant.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
20) Higher government deficits ________ the supply of bonds and shift the supply curve to the
________, everything else held constant.
A) increase; left
B) increase; right
C) decrease; left
D) decrease; right
21) 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) a business cycle recession.
22) When the inflation rate is expected to increase, the ________ for bonds falls, while the
________ curve shifts to the right, everything else held constant.
A) demand; demand
B) demand; supply
C) supply; demand
D) supply; supply
23) When the expected inflation rate increases, the demand for bonds ________, the supply of
bonds ________, and the interest rate ________, everything else held constant.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
24) Everything else held constant, when the inflation rate is expected to rise, interest rates will
________; this result has been termed the ________.
A) fall; Keynes effect
B) fall; Fisher effect
C) rise; Keynes effect
D) rise; Fisher effect
25) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest
rates ________ as the expected rate of inflation ________, everything else held constant.
A) rise; increases
B) rise; stabilizes
C) fall; stabilizes
D) fall; increases
26) Everything else held constant, during a business cycle expansion, the supply of bonds shifts
to the ________ as businesses perceive more profitable investment opportunities, while the
demand for bonds shifts to the ________ as a result of the increase in wealth generated by the
economic expansion.
A) right; left
B) right; right
C) left; left
D) left; right
27) When the economy slips into a recession, normally the demand for bonds ________, the
supply of bonds ________, and the interest rate ________, everything else held constant.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises
28) When an economy grows out of a recession, normally the demand for bonds ________ and
the supply of bonds ________, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
29) Deflation causes the demand for bonds to ________, the supply of bonds to ________, and
bond prices to ________, everything else held constant.
A) increase; increase; increase
B) increase; decrease; increase
C) decrease; increase; increase
D) decrease; decrease; increase
30) In the 1990s Japan had the lowest interest rates in the world due to a combination of
A) inflation and recession.
B) deflation and expansion.
C) inflation and expansion.
D) deflation and recession.
31) When the interest rate changes,
A) the demand curve for bonds shifts to the right.
B) the demand curve for bonds shifts to the left.
C) the supply curve for bonds shifts to the right.
D) it is because either the demand or the supply curve has shifted.
32) The interest rate falls when either the demand for bonds ________ or the supply of bonds
________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
33) When the government has a surplus, as occurred in the late 1990s, the ________ curve of
bonds shifts to the ________, everything else held constant.
A) supply; right
B) supply; left
C) demand; right
D) demand; left
34) A decrease in the brokerage commissions in the housing market from 6% to 5% of the sales
price will shift the ________ curve for bonds to the ________, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
35) When the prices of rare coins become volatile, the ________ curve for bonds shifts to the
________, everything else held constant.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
36) If people expect real estate prices to increase significantly, the ________ curve for bonds
will shift to the ________, everything else held constant.
A) demand; right
B) demand; left
C) supply; left
D) supply; right
37) 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.
38) 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.
39) 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.
40) 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
41) 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
42) 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
43) 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
44) 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
45) In the figure above, a factor that could cause the supply of bonds to shift to the right is
A) a decrease in government budget deficits.
B) a decrease in expected inflation.
C) a recession.
D) a business cycle expansion.
46) In the figure above, a factor that could cause the demand for bonds to decrease (shift to the
left) is
A) an increase in the expected return on bonds relative to other assets.
B) a decrease in the expected return on bonds relative to other assets.
C) an increase in wealth.
D) a reduction in the riskiness of bonds relative to other assets.