ECO 303

Ch. 5 Quiz

Name: Shannah Henk

Multiple choice @ 1 point each. Select the best answer available.

1. The demand curve for bonds would be reduced by
A) a decrease in expected returns on other assets
B) an increase in the information costs of bonds relative to other assets
C) an increase in wealth
D) an increase in the liquidity of bonds relative to other assets
2. The supply curve for bonds would be shifted to the left by
A) a decrease in government borrowing.
B) a decrease in the corporate tax on profits.
C) an increase in tax subsidies for investment.
D) an increase in expected inflation.
3. The demand for bonds is
A) represented by a downward-sloping line when the interest rate is on the vertical axis and the quantity of bonds
demanded is on the horizontal axis.
B) represented by an upward-sloping line when the price of bonds is on the vertical axis and the quantity of bonds
demanded is on the horizontal axis.
C) equivalent to the supply of loanable funds.
D) equivalent to the demand for loanable funds.
4) Which of the following would NOT cause a change in the desire to borrow at every interest rate?
A) A decrease in the U.S. government deficit level.
B) A change in the price of bonds.
C) The economy enters an expansionary phase of the business cycle.
D) A decrease in the corporate profits tax.
5) Which of these will cause the equilibrium interest rate to rise?
A) A decrease in the supply of loanable funds
B) A decrease in the demand for loanable funds
C) An increase in the supply of loanable funds
D) A decrease in the quantity of loanable funds demanded
6) If there is an excess demand for bonds at a given price of bonds, then
A) the price of bonds will fall.
B) the interest rate will fall.
C) the interest rate will rise.
D) the interest rate may rise or the interest rate may fall depending upon the reasons for the excess demand for bonds.
7) Which of these will cause the equilibrium interest rate to rise?
A) The savings rate decreases
B) Business borrowing decreases
C) The federal deficit decreases
D) National wealth increases
8) Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury
securities when
A) income tax rates are lowered.
B) income tax rates are raised.
C) municipal bonds become more widely traded.
D) corporate bonds become riskier.
9) If the expected gains on stocks rise, while the expected returns on bonds do not change, then
A) the equilibrium interest rate will rise
B) the demand curve for bonds will shift to the right
C) the supply curve for loanable funds will shift to the right
D) the equilibrium interest rate will fall

10) A decrease in expected inflation

A) usually leads to a rise in nominal interest rates
B) will shift the bond demand curve to the left
C) will shift the supply curve for loanable funds to the right
D) results in increased nominal capital gains on physical assets
11) If there is an excess demand for loanable funds at a given interest rate, then
A) the price of bonds will fall.
B) the supply of loanable funds will shift to the right.
C) the interest rate will fall.
D) the price of bonds may rise or fall depending upon the reasons for the excess demand for loanable funds.
12) The Federal Reserve issues a report indicating that future inflation will increase from 3% to 4%. As a result
A) the demand for loanable funds shifts right.
B) the supply curve for bonds shifts left.
C) the equilibrium interest rate falls.
D) the equilibrium price of bonds rises.
13) 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
14) If fluctuations in interest rates become more volatile, then, other things equal, the demand for stocks ________
and the demand for long-term bonds ________.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase
15) In the 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.
16) 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
17) Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite
direction of the other three is the
A) liquidity effect.
B) income effect.
C) price level effect.
D) expected inflation effect.
18) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the
A) 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 an increase in money growth.
D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth.

Part II: Short Answer/Problems (4 points each)

Do all of the questions from this section.
Label completely
All answers must be legible to receive credit. Partial credit is awarded.
1. Using the supply and demand for bonds model, demonstrate graphically and describe the changes in "i" and total
lending if the government were to simultaneously cut the personal income tax and the corporate profits tax.

2. Using the supply and demand for bonds model, illustrate graphically and describe the likely changes in "i" and
total lending if inflations expectations decreases from 8% to 2%.

3. During 2000, the government repurchased $30 billion in U.S. Treasury bonds outstanding. This was the first time
this had been done since the administration of Herbert Hoover in the early 1930s. Analyze the impact of this
repurchase using the loanable funds model.