Objective type questions on bond valuation

1. Because Keynes assumed that money and bonds are the only two assets available, it must be true that

a.      M^d + M^s = B^d - B^s

b.      M^d + M^s = B^d + B^s

c.       M^d - B^d = M^s + B^s

d.      M^d + B^d = M^s + B^s

2. At interest rates below the equilibrium rate of interest

a.      there is an excess demand for money and the interest rate will rise.

b.      there is an excess supply of bonds and the interest rate will fall.

c.       there is an excess demand for bonds and the interest rate will fall.

d.      there is an excess demand for money and the interest rate will fall.

3. Using money demand and money supply:

a.      an increase in income will increase money demand and increase the interest rate.

b.      an increase in prices will increase money demand and decrease the interest rate.

c.       an increase in expected inflation will decrease money demand and decrease interest rates.

d.      an increase in the money supply will increase the interest rate.

4. In the Liquidity Preference framework, the price-level effect differs from the expected inflation effect in that:

a.      The price level effect always dominates the expected inflation effect.

b.      The price level effect is temporary and the expected inflation effect is permanent.

c.       The price level effect has a larger impact on interest rates than the expected inflation effect.

d.      The price level effect remains and the expected inflation effect reverses.

5. In Liquidity Preference, why does the demand curve for money slope downward?

a.      Because people want to hold more money when prices rise.

b.      Because people carry out more monetary transactions when their incomes rise.

c.       Because people are more willing to hold money when interest rates are low.

d.      Because the Fed increases the money supply when interest rates fall.

6. According to the ________ effect, an increase in the money supply lowers the interest rate.

a.      price-level.

b.      expected-inflation.

c.       Income.

d.      Liquidity.

7. Why does the supply curve for bonds slope upward?

a.      Because as the interest rate rises, firms are more willing to borrow money.

b.      Because as the price rises, firms are more willing to buy bonds.

c.       Because as the interest rate falls, firms are more willing to borrow money.

d.      Because as the price falls, firms are more willing to supply bonds.

8. Increasing government deficits causes

a.      The supply curve for bonds to shift right because government bonds pay higher interest relative to other bonds.

b.      The supply curve for bonds to shift left because government bonds slow expected inflation.

c.       The supply curve for bonds to shift left because corporations will borrow less due to decreased profitability when the government is in debt.

d.      The supply curve for bonds to shift right because the U.S. Treasury will issue bonds to pay for the deficit.