Question 1

Holding demand constant, an increase in the supply of loanable funds will result in a (n)  ___________ in interest rates.

Accepted Answer

A)  increase
B)  decrease
C)  increase or decrease
D)  none of the aboveE) None of the above
F) A) and B)

Question 2

Which of the following is not true of Treasury bills?

Accepted Answer

A)  long-lived
B)  sold at a discount
C)  mature at par
D)  all the above are falseE) A) and D)
F) A) and C)

Question 3

Inflation is an increase in the price of goods or services that is not offset by an increase in quality.

Accepted Answer

A) True 
 B)False

Question 4

The majority of marketable interest-bearing government obligations have a maturity of more than 5 years.

Accepted Answer

A) True 
 B)False

Question 5

The liquidity preference theory holds that securities of different maturities are not perfect substitutes for each other.

Accepted Answer

A) True 
 B)False

Question 6

The loanable funds theory states that interest rates are a function of the supply of and demand for loanable funds.

Accepted Answer

A) True 
 B)False

Question 7

Economists have estimated that the inflation rate in the United States and other countries has averaged in the ________________ range in recent years.

Accepted Answer

A)  2 to 4 percent
B)  3 to 5 percent
C)  4 to 6 percent
D)  5 to 7 percent
E)  none of the aboveF) A) and D)
G) D) and E)

Question 8

Interest rates in the United States are only influenced by domestic factors.

Accepted Answer

A) True 
 B)False

Question 9

There are two basic sources of loanable funds: current savings and the expansion of deposits of depository institutions.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is most correct?

Accepted Answer

A)  More firms fail or suffer financial distress during periods of economic expansion than during periods of economic recession.Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
B)  More firms fail or suffer financial distress during periods of recession than during periods of economic expansion.Thus, investors tend to require lower premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
C)  Fewer firms fail or suffer financial distress during periods of recession than during periods of economic expansion.Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
D)  Fewer firms fail or suffer financial distress during periods of recession than during periods of economic expansion.Thus, investors tend to require lower premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
E)  none of the aboveF) B) and E)
G) A) and E)

Question 11

The liquidity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Accepted Answer

A) True 
 B)False

Question 12

While the Federal Reserve strongly influences the supply of funds, the Treasury's major influence is on the demand for funds, as it borrows heavily to finance federal deficits.

Accepted Answer

A) True 
 B)False

Question 13

A decrease in the supply for loanable funds, holding demand constant, will cause interest rates to:

Accepted Answer

A)  increase
B)  decrease
C)  stay the same
D)  not enough information to tellE) A) and B)
F) C) and D)

Question 14

Holding demand constant, an increase in the supply of loanable funds will result in an increase in interest rates.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following characteristics of most debt instruments do not cause bond prices to vary inversely with changes in financial market interest rates?

Accepted Answer

A)  coupon rates
B)  maturity dates
C)  par redemption values
D)  bond rating
E)  all of the above cause bond prices to vary inversely with changes in financial market interest ratesF) D) and E)
G) A) and B)

Question 16

The risk-free rate of interest is found by combining the real rate of interest and the rate paid on U.S.Treasury debt.

Accepted Answer

A) True 
 B)False

Question 17

A "shock" may be defined as an unanticipated change that will cause the demand for, or supply of loanable funds to change.

Accepted Answer

A) True 
 B)False

Question 18

When referring to a "downward sloping" yield curve:

Accepted Answer

A)  as maturities shorten, interest rates decline
B)  as maturities shorten, interest rates rise
C)  as maturities lengthen, interest rates remain the same
D)  as maturities lengthen, interest rates riseE) None of the above
F) A) and B)

Question 19

Cost-push inflation occurs when prices are raised to cover rising production costs, such as wages.

Accepted Answer

A) True 
 B)False

Question 20

Compensation for those financial debt instruments that cannot be easily converted to cash at prices close to estimated fair market values is termed:

Accepted Answer

A)  liquidity premium
B)  market risk premium
C)  maturity premium
D)  none of the aboveE) A) and B)
F) C) and D)

Exam 8: Interest Rates

Compensation for those financial debt instruments that cannot be easily converted to cash at prices close to estimated fair market values is termed:

Correct AnswerverifiedShow Answer

The majority of marketable interest-bearing government obligations have a maturity of more than 5 years.

Correct AnswerverifiedShow Answer

Holding demand constant, an increase in the supply of loanable funds will result in a (n) ___________ in interest rates.

Correct AnswerverifiedShow Answer

Holding demand constant, an increase in the supply of loanable funds will result in an increase in interest rates.

Correct AnswerverifiedShow Answer

Cost-push inflation occurs when prices are raised to cover rising production costs, such as wages.

Correct AnswerverifiedShow Answer

Inflation is an increase in the price of goods or services that is not offset by an increase in quality.

Correct AnswerverifiedShow Answer

Economists have estimated that the inflation rate in the United States and other countries has averaged in the ________________ range in recent years.

Correct AnswerverifiedShow Answer

The loanable funds theory states that interest rates are a function of the supply of and demand for loanable funds.

Correct AnswerverifiedShow Answer

Which of the following characteristics of most debt instruments do not cause bond prices to vary inversely with changes in financial market interest rates?

Correct AnswerverifiedShow Answer

When referring to a "downward sloping" yield curve:

Correct AnswerverifiedShow Answer

The liquidity preference theory holds that securities of different maturities are not perfect substitutes for each other.

Correct AnswerverifiedShow Answer

Which of the following is not true of Treasury bills?

Correct AnswerverifiedShow Answer

The risk-free rate of interest is found by combining the real rate of interest and the rate paid on U.S.Treasury debt.

Correct AnswerverifiedShow Answer

Interest rates in the United States are only influenced by domestic factors.

Correct AnswerverifiedShow Answer

There are two basic sources of loanable funds: current savings and the expansion of deposits of depository institutions.

Correct AnswerverifiedShow Answer

While the Federal Reserve strongly influences the supply of funds, the Treasury's major influence is on the demand for funds, as it borrows heavily to finance federal deficits.

Correct AnswerverifiedShow Answer

A decrease in the supply for loanable funds, holding demand constant, will cause interest rates to:

Correct AnswerverifiedShow Answer

A "shock" may be defined as an unanticipated change that will cause the demand for, or supply of loanable funds to change.

Correct AnswerverifiedShow Answer

The liquidity premium is the compensation that investors demand for holding securities that cannot easily be converted to cash without major price discounts.

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

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