Chapter 4Why Do Interest Rates Change?4.1 Multiple Choice4.1.1) As the price of a bond _________ and the expected return _________, bonds become moreattractive to investors and the quantity demanded rises.A) falls; risesB) falls; fallsC) rises; risesD) rises; fallsAnswer: AQuestion Status: Previous Edition4.1.2) The supply curve for bonds has the usual upward slope, indicating that as the price _________,ceteris paribus, the _________ increases.A) falls; supplyB) falls; quantity suppliedC) rises; supplyD) rises; quantity suppliedAnswer: DQuestion Status: Previous Edition4.1.3) When the price of a bond is above the equilibrium price, there is excess _________ in the bondmarket and the price will _________.A) demand; riseB) demand; fallC) supply; fallD) supply; riseAnswer: CQuestion Status: Previous Edition4.1.4) When the price of a bond is below the equilibrium price, there is excess _________ in the bondmarket and the price will _________.A) demand; riseB) demand; fallC) supply; fallD) supply; riseAnswer: AQuestion Status: Previous Edition4.1.5) When the price of a bond is _________ the equilibrium price, there is an excess supply of bondsand the price will _________.A) above; riseB) above; fallC) below; fallD) below; rise

Answer: BQuestion Status: Previous Edition40 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.6) When the price of a bond is _________ the equilibrium price, there is an excess demand forbonds and the price will _________.A) above; riseB) above; fallC) below; fallD) below; riseAnswer: DQuestion Status: Previous Edition4.1.7) 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; riseB) demand; fallC) supply; fallD) supply; riseAnswer: BQuestion Status: Previous Edition4.1.8) 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; riseB) demand; fallC) supply; fallD) supply; riseAnswer: DQuestion Status: Previous Edition4.1.9) 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; fallB) above; demand; riseC) below; supply; fallD) above; supply; riseAnswer: AQuestion Status: Previous Edition4.1.10) 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; riseB) below; demand; fallC) below; supply; riseD) above; supply; fall

Answer: CQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 414.1.11) When the demand for bonds _________ or the supply of bonds _________, interest rate rise.A) increases; increasesB) increases; decreasesC) decreases; decreasesD) decreases; increasesAnswer: DQuestion Status: Previous Edition4.1.12) When the demand for bonds _________ or the supply of bonds _________, interest rates fall.A) increases; increasesB) increases; decreasesC) decreases; decreasesD) decreases; increasesAnswer: BQuestion Status: Previous Edition4.1.13) When the demand for bonds _________ or the supply of bonds _________, bond prices rise.A) increases; decreasesB) decreases; increasesC) decreases; decreasesD) increases; increasesAnswer: AQuestion Status: Previous Edition4.1.14) When the demand for bonds _________ or the supply of bonds _________, bond prices fall.A) increases; increasesB) increases; decreasesC) decreases; decreasesD) decreases; increasesAnswer: DQuestion Status: Previous Edition4.1.15) Factors that determine the demand for an asset include changes in theA) 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: EQuestion Status: Previous Edition4.1.16) The demand for an asset rises if _________ falls.A) risk relative to other assets

B) expected return relative to other assetsC) liquidity relative to other assetsD) wealthAnswer: AQuestion Status: Previous Edition42 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.17) The higher the standard deviation of returns on an asset, the _________ is the assetʹs _________.A) greater; riskB) smaller; riskC) greater; expected returnD) smaller; expected returnAnswer: AQuestion Status: Previous Edition4.1.18) Diversification benefits an investor byA) increasing wealth.B) increasing expected return.C) reducing risk.D) increasing liquidity.Answer: CQuestion Status: Previous Edition4.1.19) In a recession when income and wealth are falling, the demand for bonds _________ and thedemand curve shifts to the _________.A) falls; rightB) falls; leftC) rises; rightD) rises; leftAnswer: BQuestion Status: Previous Edition4.1.20) During business cycle expansions when income and wealth are rising, the demand for bonds_________ and the demand curve shifts to the _________.A) falls; rightB) falls; leftC) rises; rightD) rises; leftAnswer: CQuestion Status: Previous Edition4.1.21) For a holding period of one year, the expected return on a consol is _________ the higher is theprice of the consol today, and _________ the higher is the price of the consol next year.A) higher; higherB) higher; lowerC) lower; higher

D) lower; lowerAnswer: CQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 434.1.22) Higher expected interest rates in the future _________ the demand for long-term bonds andshift the demand curve to the _________.A) increase; leftB) increase; rightC) decrease; leftD) decrease; rightAnswer: CQuestion Status: Previous Edition4.1.23) Lower expected interest rates in the future _________ the demand for long -term bonds andshift the demand curve to the _________A) increase; left.B) increase; right.C) decrease; left.D) decrease; right.Answer: BQuestion Status: Previous Edition4.1.24) When people begin to expect a large stock market decline, the demand curve for bonds shifts tothe _________ and the interest rate _________.A) right; fallsB) right; risesC) left; fallsD) left; risesAnswer: AQuestion Status: Previous Edition4.1.25) When people begin to expect a large run up in stock prices, the demand curve for bonds shiftsto the _________ and the interest rate _________.A) right; risesB) right; fallsC) left; fallsD) left; risesAnswer: DQuestion Status: Previous Edition4.1.26) An increase in the expected rate of inflation will _________ the expected return on bondsrelative to that on _________ assets, and shift the _________ curve to the left.A) reduce; financial; demandB) reduce; real; demandC) raise; financial; supply

D) raise; real; supplyAnswer: BQuestion Status: Previous Edition44 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.27) A decrease in the expected rate of inflation will _________ the expected return on bondsrelative to that on _________ assets.A) reduce; financialB) reduce; realC) raise; financialD) raise; realAnswer: DQuestion Status: Previous Edition4.1.28) When the expected inflation rate increases, the demand for bonds _________, the supply ofbonds _________, and the interest rate _________.A) increases; increases; risesB) decreases; decreases; fallsC) increases; decreases; fallsD) decreases; increases; risesAnswer: DQuestion Status: Previous Edition4.1.29) When the expected inflation rate decreases, the demand for bonds _________, the supply ofbonds _________, and the interest rate _________.A) increases; increases; risesB) decreases; decreases; fallsC) increases; decreases; fallsD) decreases; increases; risesAnswer: CQuestion Status: Previous Edition4.1.30) When bond interest rates become more volatile, the demand for bonds _________ and theinterest rate _________.A) increases; risesB) increases; fallsC) decreases; fallsD) decreases; risesAnswer: DQuestion Status: Previous Edition4.1.31) When bond interest rates become less volatile, the demand for bonds _________ and theinterest rate _________.A) increases; risesB) increases; fallsC) decreases; falls

D) decreases; risesAnswer: BQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 454.1.32) When prices in the stock market become more uncertain, the demand curve for bonds shifts tothe _________ and the interest rate _________.A) right; risesB) right; fallsC) left; fallsD) left; risesAnswer: BQuestion Status: Previous Edition4.1.33) When stock prices become less volatile, the demand curve for bonds shifts to the _________and the interest rate _________.A) right; risesB) right; fallsC) left; fallsD) left; risesAnswer: DQuestion Status: Previous Edition4.1.34) When bonds become more widely traded, and as a consequence the market becomes moreliquid, the demand curve for bonds shifts to the _________ and the interest rate _________.A) right; risesB) right; fallsC) left; fallsD) left; risesAnswer: BQuestion Status: Previous Edition4.1.35) 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; risesB) right; fallsC) left; fallsD) left; risesAnswer: DQuestion Status: Previous Edition4.1.36) Factors that cause the demand curve for bonds to shift to the left includeA) 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: DQuestion Status: Previous Edition46 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.37) Factors that cause the demand curve for bonds to shift to the left includeA) 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: CQuestion Status: Previous Edition4.1.38) During an economic expansion, the supply of bonds _________ and the supply curve shifts tothe _________.A) increases, leftB) increases, rightC) decreases, leftD) decreases, rightAnswer: BQuestion Status: Previous Edition4.1.39) During a recession, the supply of bonds _________ and the supply curve shifts to the_________.A) increases, leftB) increases, rightC) decreases, leftD) decreases, rightAnswer: CQuestion Status: Previous Edition4.1.40) An increase in expected inflation causes the supply of bonds to _________ and the supplycurve to shift to the _________.A) increase, leftB) increase, rightC) decrease, leftD) decrease, rightAnswer: BQuestion Status: Previous Edition4.1.41) When the federal governmentʹs budget deficit increases, the _________ curve for bonds shifts tothe _________.A) demand; right

B) demand; leftC) supply; leftD) supply; rightAnswer: DQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 474.1.42) When the federal governmentʹs budget deficit decreases, the _________ curve for bonds shiftsto the _________.A) demand; rightB) demand; leftC) supply; leftD) supply; rightAnswer: CQuestion Status: Previous Edition4.1.43) When the inflation rate is expected to increase, the expected return on bonds relative to realassets falls for any given interest rate; as a result, the _________ bonds falls and the _________curve shifts to the left.A) demand for; demandB) demand for; supplyC) supply of; demandD) supply of; supplyAnswer: AQuestion Status: Previous Edition4.1.44) When the inflation rate is expected to increase, the real cost of borrowing declines at any giveninterest rate; as a result, the _________ bonds increases and the _________ curve shifts to theright.A) demand for; demandB) demand for; supplyC) supply of; demandD) supply of; supplyAnswer: DQuestion Status: Previous Edition48 Mishkin/Eakins · Financial Markets and Institutions, Sixth EditionFigure 4.14.1.45) In Figure 4.1, the most likely cause of the increase in the equilibrium interest rate from i1 to i2isA) 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: CQuestion Status: Previous Edition4.1.46) In Figure 4.1, the most likely cause of the increase in the equilibrium interest rate from i1 to i2is a(n) _________ in the _________.A) increase; expected inflation rateB) decrease; expected inflation rateC) increase; government budget deficitD) decrease; government budget deficitAnswer: AQuestion Status: Previous Edition4.1.47) In Figure 4.1, the most likely cause of a decrease in the equilibrium interest rate from i2 to i1 isA) 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: BQuestion Status: Previous Edition4.1.48) Factors that can cause the supply curve for bonds to shift to the right includeA) 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: AQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 494.1.49) Factors that can cause the supply curve for bonds to shift to the left includeA) 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: BQuestion Status: Previous Edition4.1.50) The economist Irving Fisher, after whom the Fisher effect is named, explained why interestrates _________ as the expected rate of inflation _________.A) rise; increasesB) rise; stabilizesC) rise; decreasesD) fall; increasesE) fall; stabilizesAnswer: A

Question Status: Previous Edition4.1.51) An increase in the expected rate of inflation causes the demand for bonds to _________ and thesupply for bonds to _________.A) fall; fallB) fall; riseC) rise; fallD) rise; riseAnswer: BQuestion Status: Previous Edition4.1.52) A decrease in the expected rate of inflation causes the demand for bonds to _________ and thesupply of bonds to _________.A) fall; fallB) fall; riseC) rise; fallD) rise; riseAnswer: CQuestion Status: Previous Edition4.1.53) When the economy slips into a recession, normally the demand for bonds _________, thesupply of bonds _________, and the interest rate _________.A) increases; increases; risesB) decreases; decreases; fallsC) increases; decreases; fallsD) decreases; increases; risesAnswer: BQuestion Status: Previous Edition50 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.54) When the economy enters into a boom, normally the demand for bonds _________,the supply of bonds _________, and the interest rate _________.A) increases; increases; risesB) decreases; decreases; fallsC) increases; decreases; risesD) decreases; increases; risesAnswer: AQuestion Status: Previous EditionFigure 4.24.1.55) 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 rateB) decrease; the expected inflation rateC) increase; economic growthD) decrease; economic growth

Answer: CQuestion Status: Previous Edition4.1.56) In Figure 4.2, one possible explanation for the increase in the interest rate from i1 to i2 isA) 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: AQuestion Status: Previous Edition4.1.57) In Figure 4.2, one possible explanation for a decrease in the interest rate from i2to i1 isA) 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: CQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 514.1.58) In Keynesʹs liquidity preference framework, individuals are assumed to hold their wealth intwo forms:A) real assets and financial assets.B) stocks and bonds.C) money and bonds.D) money and gold.Answer: CQuestion Status: Previous Edition4.1.59) 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 expectedreturn on bonds, causing the demand for money to _________.A) rise; fallB) rise; riseC) fall; fallD) fall; riseAnswer: AQuestion Status: Previous Edition4.1.60) 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 effectsfrom 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: BQuestion Status: Previous Edition4.1.61) When comparing the loanable funds and liquidity preference frameworks of interest ratedetermination, which of the following is true?A) The liquidity preference framework is easier to use when analyzing the effects of changesin expected inflation.B) The loanable funds framework provides a simpler analysis of the effects of changes inincome, the price level, and the supply of money.C) In most instances, the two approaches to interest rate determination yield the samepredictions.D) All of the above are true.E) Only A and B of the above are true.Answer: CQuestion Status: Previous Edition4.1.62) 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: DQuestion Status: Previous Edition52 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.63) 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: AQuestion Status: Previous Edition4.1.64) A rise in the price level causes the demand for money to _________ and the demand curve toshift to the _________A) decrease; right.B) decrease; left.C) increase; right.

D) increase; left.Answer: CQuestion Status: Previous Edition4.1.65) A decline in the price level causes the demand for money to _________ and the demand curveto shift to the _________A) decrease; right.B) decrease; left.C) increase; right.D) increase; left.Answer: BQuestion Status: Previous Edition4.1.66) A decline in the expected inflation rate causes the demand for money to _________ and thedemand curve to shift to the _________A) decrease; right.B) decrease; left.C) increase; right.D) increase; left.Answer: BQuestion Status: Previous Edition4.1.67) Holding everything else constant, an increase in the money supply causesA) 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: AQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 534.1.68) Holding everything else constant, a decrease in the money supply causesA) 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: BQuestion Status: Previous EditionFigure 4.34.1.69) In Figure 4.3, the factor responsible for the decline in the interest rate isA) 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: CQuestion Status: Previous Edition4.1.70) In Figure 4.3, the decrease in the interest rate from i1 to i2 can be explained byA) 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: BQuestion Status: Previous Edition54 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.71) In Figure 4.3, an increase in the interest rate from i2 to i1 can be explained byA) 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: AQuestion Status: Previous Edition4.1.72) Of the four effects on interest rates from an increase in the money supply, the one that works inthe opposite direction of the other three is theA) liquidity effect.B) income effect.C) price level effect.D) expected inflation effect.Answer: AQuestion Status: Previous Edition4.1.73) Of the four effects on interest rates from an increase in the money supply, the initial effect is,generally, theA) income effect.B) liquidity effect.C) price level effect.D) expected inflation effect.Answer: BQuestion Status: Previous Edition4.1.74) If the liquidity effect is smaller than the other effects, and the adjustment of expected inflationis slow, then theA) 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 anincrease in money growth.

D) interest rate will initially rise but eventually fall below the initial level in response to anincrease in money growth.Answer: CQuestion Status: Previous Edition4.1.75) When the growth rate of the money supply increases, interest rates end up being permanentlylower ifA) 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: AQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 554.1.76) When the growth rate of the money supply decreases, interest rates end up being permanentlylower ifA) 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: DQuestion Status: Previous Edition4.1.77) When the growth rate of the money supply is decreased, interest rates will rise immediately ifthe liquidity effect is _________ than the other effects and if there is _________ adjustment ofexpected inflation.A) larger; rapidB) larger; slowC) smaller; slowD) smaller; rapidAnswer: BQuestion Status: Previous Edition4.1.78) When the growth rate of the money supply is increased, interest rates will rise immediately ifthe liquidity effect is _________ than the other effects and if there is _________ adjustment ofexpected inflation.A) larger; rapidB) larger; slowC) smaller; slowD) smaller; rapidAnswer: DQuestion Status: Previous Edition

4.1.79) If the Fed wants to permanently lower interest rates, then it should lower the rate of moneygrowth ifA) 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: CQuestion Status: Previous Edition4.1.80) If the Fed wants to permanently lower interest rates, then it should raise the rate of moneygrowth ifA) 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: DQuestion Status: Previous Edition56 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.81) Milton Friedman contends that it is entirely possible that when the money supply rises, interestrates may _________ if the _________ effect is more than offset by changes in income, the pricelevel, and expected inflation.A) fall; liquidityB) fall; riskC) rise; liquidityD) rise; riskAnswer: CQuestion Status: Previous EditionFigure 4.44.1.82) Figure 4.4 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 andinterest rates adjust _________ to changes in expected inflation.A) smaller; quicklyB) larger; quicklyC) larger; slowlyD) smaller; slowlyAnswer: AQuestion Status: Previous Edition4.1.83) Figure 4.4 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 tochanges in expected inflation.B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly tochanges in expected inflation.C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly tochanges in expected inflation.D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quicklyto changes in expected inflation.Answer: CQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 57Figure 4.54.1.84) 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 andinterest rates adjust _________ to changes in expected inflation.A) smaller; quicklyB) larger; quicklyC) larger; slowlyD) smaller; slowlyAnswer: CQuestion Status: Previous Edition4.1.85) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure,one can conclude that theA) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly tochanges in expected inflation.B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly tochanges in expected inflation.C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly tochanges in expected inflation.D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quicklyto changes in expected inflation.Answer: AQuestion Status: Previous Edition4.1.86) _______ is the total resources owned by the individual, including all assets.

A) Expected returnB) WealthC) LiquidityD) RiskAnswer: BQuestion Status: New58 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.1.87) A ________ prefers stock in the less risky asset than in the riskier asset.A) risk preferrerB) risk-averse personC) risk loverD) risk-favorable personAnswer: BQuestion Status: New4.1.88) When the quantity of bonds demanded equals the quantity of bonds supplied there isA) excess supply.B) excess demand.C) market equilibrium.D) asset market approach.Answer: CQuestion Status: New4.1.89) Determining asset prices using stocks of assets rather than flow is calledA) asset transformation.B) expected return.C) asset market approach.D) market equilibrium.Answer: CQuestion Status: New4.1.90) What is the model whose equations are estimated using statistical procedures used inforecasting interest rates called?A) econometric modelB) liquidity preference frameworkC) market equilibriumD) Fisher effectAnswer: AQuestion Status: New4.2 True/False4.2.1) When interest rates decrease, the demand curve for bonds shifts to the left.Answer: FALSEQuestion Status: Previous Edition

4.2.2) When an economy grows out of a recession, normally the demand for bonds increases and thesupply of bonds increases.Answer: TRUEQuestion Status: Previous Edition4.2.3) When the federal governmentʹs budget deficit decreases, the demand curve for bonds shifts tothe right.Answer: FALSEQuestion Status: Previous EditionChapter 4 Why Do Interest Rates Change? 594.2.4) Investors make their choices of which assets to hold by comparing the expected return,liquidity, and risk of alternative assets.Answer: TRUEQuestion Status: Previous Edition4.2.5) A person who is risk averse prefers to hold assets that are more, not less, risky.Answer: FALSEQuestion Status: Previous Edition4.2.6) Interest rates are procyclical in that they tend to rise during business cycle expansions and fallduring recessions.Answer: TRUEQuestion Status: Previous Edition4.2.7) When income and wealth are rising, the demand for bonds rises and the demand curve shiftsto the right.Answer: TRUEQuestion Status: Previous Edition4.2.8) An increase in the inflation rate will cause the demand curve for bonds to shift to the right.Answer: FALSEQuestion Status: Previous Edition4.2.9) The Fisher Effect predicts that an incease in expected inflation will lower the interest rate onbonds.Answer: FALSEQuestion Status: Previous Edition4.2.10) An increase in the federal government budget deficit will raise the interest rate on bonds.Answer: TRUEQuestion Status: Previous Edition4.2.11) Holding everything else constant, an increase in wealth lowers the quantity demanded of anasset.

Answer: FALSEQuestion Status: New4.2.12) An increase in an assetʹs expected return relative to that of an alternative asset, holdingeverthing else unchanged, raises the quantity demanded of the asset.Answer: TRUEQuestion Status: New4.2.13) The more liquid an asset is relative to alternative assets, holding everything else unchanged,the more desirable it is, and the greater will be the quantity demanded.Answer: TRUEQuestion Status: New60 Mishkin/Eakins · Financial Markets and Institutions, Sixth Edition4.2.14) A movement along the demand (or supply) curve occurs when the quantity demanded (orsupplied) changes at each given price (or interest rate) of the bond in response to a change insome other factor besides the bondʹs price or interest rate.Answer: FALSEQuestion Status: New4.3 Essay4.3.1) Identify and explain the four factors that influence asset demand. Which of these factors affecttotal asset demand and which influence investors to demand one asset over another?Question Status: Previous Edition4.3.2) How is the equilibrium interest rate determined in the bond market? Explain why the interestrate will move toward equilibrium if it is temporarily above or below the equilibrium rate.Question Status: Previous Edition4.3.3) Use the bond demand and supply framework to explain the Fisher effect and why it occurs.Question Status: Previous Edition4.3.4) If investors perceive greater interest rate risk, what will happen to the equilibrium interest ratein the bond market? Explain using the bond demand and supply framework.Question Status: Previous Edition4.3.5) How will a decrease in the federal governmentʹs budget deficit affect the equilibrium interestrate in the bond market? Explain using the bond demand and supply framework.Question Status: Previous Edition4.3.6) 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 youprefer this bond or one with an identical expected return and a standard deviation of 4.5?Why?Question Status: Previous Edition4.3.7) Identify and describe three factors that cause the supply curve for bonds to shift.Question Status: New