VANCOUVER ISLAND UNIVERSITY
ECON100: PRINCIPLES OF ECONOMICS
Sample Final Exam, Spring 2013
Total marks
Duration: Minutes
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THIS EXAM HAS TOTAL 11 PAGES INCLUDING THE COVER PAGE
Use of any electronics device except calculator is strictly prohibited during the exam
– your cell/mobile phone could be your biggest enemy!!
Instructions:
a) Please answer your MCQs in the table on additional answer sheet supplied and short
question answers in the space provided.
b) For short answer questions
o
You must show your all work to get full marks. If you do not show work, you may
not get full marks even for a correct answer.
o Use the marks assigned to each question as a guide to allocating your time
across questions.
Good luck on your exam
ECON100; Sample Final Exam 2
Spring 2013
PART A: MCQ
(In this section there are 50 MCQs, which is worth 50 marks)
1.
The circular flow of income illustrates
a) that there is no relationship between goods markets and factor markets
b) the interaction of households and firms through the factors and goods markets
c) that the flow of payments moves in the same direction as the flow of goods
d) the flows of expenditures and income in a household
e) that firms own the factors of production
2.
Economists usually assume that households and firms, respectively, maximize
a) Savings and profits
b) Utility and profits
c) Income and sales
d) Wages and revenues
e) Expenditures and profits
3.
In GDP calculation the value of only __________ are included.
a)
b)
c)
d)
final goods and services
intermediate goods
consumption goods
national income goods
4.
Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies,
________ depreciation.
a) minus; plus; plus
b) plus; minus; plus
c) plus; plus; plus
d) plus; plus; minus
e) plus; minus; minus
5.
In macroeconomics, the "output gap" is the difference between
a) real and nominal national income
b) output and employment
c) output in the current year and output in the base year
d) real GNP and real GDP
e) potential GDP and actual real GDP
ECON100; Sample Final Exam 3
Spring 2013
6.
If a country's labour force is 20 million people, and 2 million of those are unemployed, the country's
unemployment rate is
a) 9.0 percent
b) 3.3 percent
c) 2.5 percent
d) 10.0 percent
e) 4.5 percent
7.
Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure
to achieve full employment, it can generally be concluded that the larger this output gap, the
a) greater is the unemployment rate
b) more upward pressure there is on prices
c) lower the deadweight loss of unemployment
d) greater is the employment rate
e) lower is frictional unemployment
8.
If nominal national income increased by 20 percent over a certain period of time while real national income
increased by 10 percent, then
a) the price level has increased by about 10 percent
b) inflation has occurred during this time period
c) the labour force increased by 10 percent
d) everybody in the economy became worse off
e) the price level has increased by approximately 10 percent
9.
Workers with marketable skills sometimes quit a job and become unemployed, with the expectation of soon
finding a better job. This type of unemployment is called
a) historical unemployment
b) frictional unemployment
c) overly-optimistic unemployment
d) cyclical unemployment
e) structural unemployment
10. Economic theory argues that there will be fewer real effects from inflation as long as the
a) actual rate of inflation is less than 5 percent
b) anticipated rate of inflation is more than the actual rate of inflation
c) whole private sector is unaware that it is happening
d) anticipated rate of inflation is less than the actual rate of inflation
e) inflation is fully anticipated and no one changes their behaviour
11. Inflation hurts
a) all producers
b) borrowers
c) lenders
d) all consumers
12. When there is a supply-push inflation, prices rise and real output
a) is constant
b) decreases
c) falls or rises
d) rises
ECON100; Sample Final Exam 4
Spring 2013
13. Demand shocks cause
a) increases in GDP
b) cost-push inflation
c) demand-pull inflation
d) falling wages
14. The velocity of money is
a) the time it takes for monetary policy to have an effect on world financial markets
b) the number of times per year a dollar is spent on final goods and services
c) the time it takes to produce money
d) the time lag from when the money supply is increased until the effect takes place
15. If real GDP is growing at 2 percent per year
a) real GDP will be double in 7 years
b) potential GDP will double in 7 years
c) real GDP will double in 35 years
d) nominal GDP will double in 14 years
The natural rate of unemployment does not include which of the following?
a) Cyclical unemployment
b) Seasonal unemployment
c) The natural rate of unemployment includes all of the above
d) frictional unemployment
17.
An output gap is
a) positive for a recessionary gap
b) negative for a recessionary gap
c) positive if real GDP is below potential GDP
d) negative if real GDP is above potential GDP
18. Suppose that Moby went from a stay-at-home father to a paid worker. He now earns $300 a week but pays $150
a week for daycare and $50 a week for a housekeeper. Moby is better off by
a) $100 and GDP increases by $550
b) $500 and GDP increases by $150
c) $150 and GDP increases by $500
d) $100 and GDP increases by $500
19. Real GDP per person is a limited measure of well-being because it excludes
a) nonmarket production
b) the quantity of products
c) the age distribution
d) the growth of GDP
20. Suppose that 23 million people are employed, 3 million people are unemployed, and 35 million people are 15 years
of age or older. Which of the following is true?
a) The unemployment rate is 20%
b) The size of the labour force is 26 million
c) The unemployment rate is 3 percent
d) The labour force participation rate is 26%
21. The Phillips curve shows the relationship between
a) the interest rate and exchange rate
b) the tax rate and tax revenues
c) the price level and real GDP
d) the unemployment rate and inflation rate
16.
ECON100; Sample Final Exam 5
Spring 2013
22. Who should be counted as unemployed?
a) Rajinder, who lost his job at the power plant and is not looking for work
b) Reetu, who is retired
c) Sirena, who is working part-time at a fast-food restaurant
d) Miguel, who lost her job as a teacher and is currently searching for a new job
23. According to quantity theory of money, an increase in the quantity of money causes
a) a lower percentage increase in average prices
b) a higher percentage increase in average prices
c) an equal percentage increase in average prices
d) an equal percentage decrease in average prices
24. The CPI in 2010 was 119.84. In 2009 it was 114.88. The inflation rate between 2009 and 2010 was
a) -4.14%
b) -6.91%
c) 4.32%
d) 3.46%
25. Stagflation occurs when
a) both inflation and unemployment are falling
b) inflation is falling and unemployment is rising
c) inflation is rising and unemployment is falling
d) both inflation and unemployment is rising
26. According to the law of aggregate supply
a) higher prices create incentives of increased production through higher profits
b) lower prices stimulate more consumer purchases and higher marginal opportunity costs of production
c) higher prices crease incentives for decreased production since consumers prefer lower prices
d) lower prices stimulate more consumer purchases and more production
27. The OPEC oil price shocks of the 1970s caused a
a) positive demand shock
b) negative demand shock
c) negative supply shock
d) positive supply shock
28. For the “No, markets fail is quickly self-adjust” camp, when a negative demand shock occurs,
a) lower interest rate will increase investment
b) workers and employers accept layoffs instead of lower wages
c) falling prices will increase consumer demand for products/services
d) falling Canadian prices decrease net exports
29. Aggregate demand for real GDP
a) increases when there is a positive supply shock
b) increases when there is a negative demand shock
c) decreases when there is a negative demand shock
d) decreases when there is a negative supply shock
30. The aggregate quantity demanded of real GDP
a) increases when the average level of prices falls
b) decreases when the average level of prices falls
c) increases when there is a negative supply shock
d) decreases when there is a positive supply shock
31. For the “yes, markets quickly self-adjust” camp, when a negative demand shock occurs
a) workers and employers accept lower wages
b) lower interest rates will decrease investment
c) falling prices will lower the sales of products/services
d) falling Canadian prices decrease net exports
ECON100; Sample Final Exam 6
Spring 2013
32. One factor that results in changes in AS is the
a) business choice of quantities to produce
b) consumer choice to seek more education
c) consumer choice of the quantities of owned inputs to supply
d) business choice of what to produce
33. Change in AD will occur when
a) taxes change
b) the average level of prices decreases or increases
c) there is an increase in the production
d) new technology is introduced
34. Say’s Law appears to be in trouble when
a) consumers save some of their money instead of spend it
b) consumers borrow all of their money
c) taxes are raised
d) investment is based on borrowed funds
35. Mismatches between AS and AD are consistent with
a) a ‘No’ answer to the fundamental macroeconomic question
b) a ‘Yes’ answer to the fundamental macroeconomic
c) Say’s law
d) Equilibrium
36. Which of the following statement is true?
a) All interest rates tend to rise together and fall together
b) There are many interest rates, and they move independently of each other
c) Interest rates on loans and interest rates on savings accounts move in opposite directions
d) There is one official interest rate, but other indicator rates influence the official rate
37. Convertible paper money
a) is against the law to use
b) is a tradable product with alternative uses serving as money
c) is paper money that can be converted into gold on demand
d) includes balances in bank accounts that can be withdrawn on demand
38. Using money as a medium of exchange is more efficient than barter because
a) barter requires a double coincidence of wants
b) money dominates all products and services as a store of value
c) products and services cannot be used as a unit of account
d) money is only asset that can be used as a store of value
39. The “Yes” and “No” camps disagree about
a) whether money affects prices and inflation
b) whether or not changes in the demand and supply of money can directly affect real GDP
c) whether money exchange is better than barter exchange
d) whether money supply helps markets quickly adjust to equilibrium
40. When Kate and Sam use dollars to compare the worth of their respective cars, money is acting as a
a) store of value
b) unit of account
c) standard of purchase
d) medium of exchange
41. Money indirectly affects
a) aggregate supply
b) standardized production
c) unemployment
d) the price level
ECON100; Sample Final Exam 7
Spring 2013
42. economists view the demand for money as basically a demand for
a) status
b) investment
c) liquidity
d) bonds
43. How much does money matter for business cycle? According to “Yes, markets left alone will adjust” camp
a) money has no effect
b) money adds new external supply shocks
c) money blocks the transmission mechanism and slows the adjustment to equilibrium
d) money creates new shocks
44. If Rena withdrew $500 in cash from a saving account and deposit it into a chequing account
a) M1 increased and M2 decreased
b) M1 and M2 increased
c) M1 and M2both increased
d) M1 decreased and M2 increased
45. Bond prices and interest rates are
a) inversely related and determined in only the bond market
b) inversely related and determined together in the money and bond markets
c) directly related and determined together in money and bond markets
d) directly related and determined in only the money market
46. If interest rates rise, the market price of bands
a) falls. If you sell the bond you take an unexpected loss
b) rises. If you sell the bond you make as unexpected profit
c) falls. If you sell bond you make an unexpected profit
d) rises. If you sell the bond you take an unexpected loss
47. When real GDP increases it will cause the demand for money to
a) increase
b) either increase or decrease
c) decrease
d) become more liquid
48. If you deposit $5,000 cash, and your bank chooses to keep 20 percent of deposits as reserves, there can be
a) $3,000 in new money created
b) $4,000 in new money created
c) $1, 000 in new money created
d) $5,000 in new money created
49. Refer to the figure. Suppose the economy is in equilibrium at 𝑌1 . A contractionary fiscal policy would restore the
economy to potential output (𝑌 ∗ ) by shifting the
a)
b)
c)
d)
AD to the left to intersect AS at point A
AS curve to the left to intersect AD at C
potential GDP and the AS curve to the left
AS curve to the right
ECON100; Sample Final Exam 8
Spring 2013
50. A former Governor of the Bank of Canada argued that interest rates must be increased in order to reduce inflation,
and this would ultimately result in lower interest rates. This apparent contradiction can be explained by noting that
a) higher interest rates in the short run put downward pressure on inflation which, in turn, lowers demand
for borrowed funds, thus decreasing interest rates in the long run
b) interest rates move in cycles and therefore tend to rise before they fall
c) higher interest rates promote saving which increases the supply of funds for lending and, other things
constant, drives the "price" of borrowing down
d) the Governor of the Bank of Canada is typically a patronage appointment with little formal training or
knowledge of economic theory
51. Refer to the figure. This figure illustrates
a)
b)
c)
d)
only the first step of the monetary transmission mechanism
the first two steps of the monetary transmission mechanism
the entire monetary transmission mechanism
the ultimate effect of a change in the money supply on real GDP
52. Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing
either ________ or ________, but not both.
a) the price level; the interest rate
b) the money supply; the interest rate
c) money supply; money demand
d) aggregate demand; the interest rate
ECON100; Sample Final Exam 9
Spring 2013
PART B: SAQ
(This section contains short answer question and is worth 50 marks)
Question 01 (8 marks)
In your own words, define GDP, the unemployment rate, inflation and deflation.
Gross Domestic Product (GDP) is roughly the market value of all products/services produced in
country in one year. Two types of GDP: Nominal GDP and Real GDP
Unemployment rate is the percentage of people who are unemployed and actively looking for jobs.
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 =
𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
× 100%
Inflation rate is the percentage change or the growth rate in the price level. When the percentage
change in the price level is negative it is called the deflation rate.
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝐶𝑃𝐼𝑡 − 𝐶𝑃𝐼𝑡−1
× 100%
𝐶𝑃𝐼𝑡−1
ECON100; Sample Final Exam 10
Spring 2013
Question 02 (7 marks)
Consider the following data for a hypothetical economy that produces two goods, milk and honey.
Year 1
Year 2
Quantity Produced
Milk (Litres)
Honey (Kg)
100
40
120
25
Prices
Milk ($/Litre)
2
3
Honey ($/Kg)
6
6
a. (4 marks) Using Year 1 as the base year, compute real GDP for each year.
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑡 = ∑ 𝑃𝑟𝑖𝑐𝑒0 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑡
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃1 = ∑ 𝑃𝑟𝑖𝑐𝑒0 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦0
= 100 × 2 + 40 × 6 = 𝟒𝟒𝟎
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃2 = ∑ 𝑃𝑟𝑖𝑐𝑒0 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦2
= 120 × 2 + 25 × 6 = 𝟑𝟗𝟎
b.
(3 marks) What is the growth rate?
Economic growth rate or growth rate is the percentage change in the real GDP compared to the last
year.
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑦𝑒𝑎𝑟2 − 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑦𝑒𝑎𝑟1
𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 =
× 100%
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑦𝑒𝑎𝑟1
=
390 − 440
× 100% = −𝟏𝟏. 𝟑𝟔%
440
The economic growth rate was negative, -11.36%
ECON100; Sample Final Exam 11
Spring 2013
Question 03 (10 marks)
A typical family on Sandy Island consumes only milk and honey. The table below provides with information
on prices and quantities consumed by the family:
Year 1
Year 2
Items
Milk (Litres)
10
10
Honey (Kg)
4
4
Prices
Milk ($/Litre)
2
3
Honey ($/Kg)
6
6
a. (2 marks) Identify the consumer basket
The consumer basket contains two goods only: 100 litres of Milk and 40kg of Honey
b. (5 marks) Calculate the Consumer Price Index (CPI) for both years assuming last year as the base year
𝐶𝑃𝐼𝑡 =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑡
× 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
𝐶𝑃𝐼𝑦𝑒𝑎𝑟 1 =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑦𝑒𝑎𝑟 1
× 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 (𝑦𝑒𝑎𝑟 1)
10 × 2 + 4 × 6
× 100
10 × 2 + 4 × 6
44
=
× 100 = 𝟏𝟎𝟎
44
=
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑦𝑒𝑎𝑟2
× 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 (𝑦𝑒𝑎𝑟 1)
10 × 3 + 4 × 6
=
× 100
44
56
=
× 100 = 𝟏𝟐𝟕. 𝟐𝟕
44
𝐶𝑃𝐼𝑦𝑒𝑎𝑟 2 =
c. (3 marks) Calculate the CPI inflation rate
CPI Inflation rate is the percentage change in the CPI
𝐶𝑃𝐼 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒2 =
=
𝐶𝑃𝐼𝑦𝑒𝑎𝑟2 − 𝐶𝑃𝐼𝑦𝑒𝑎𝑟1
× 100%
𝐶𝑃𝐼𝑦𝑒𝑎𝑟1
127.27 − 100
× 100% = 𝟐𝟕. 𝟐𝟕%
100
ECON100; Sample Final Exam 12
Spring 2013
Question 04 (5 marks)
In the first quarter of 2009, real GDP (measured in 2002 dollars) was $1492 billion and potential GDP was
$1331 billion. What kind of gap existed and what was its size
GPD gap is the difference between the actual GDP and the potential GDP at any time period. When
the gap is positive, it’s called inflationary/expansionary gap. If the gap is negative it’s called
recessionary/deflationary gap.
𝑮𝑫𝑷 𝑮𝒂𝒑𝒕 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑹𝒆𝒂𝒍 𝑮𝑫𝑷𝒕 − 𝑷𝒐𝒕𝒆𝒏𝒕𝒊𝒂𝒍 𝑮𝑫𝑷𝒕
𝐺𝐷𝑃 𝐺𝑎𝑝2009𝑄1 = $1492𝑏𝑖𝑙𝑙𝑖𝑜𝑛 − $1331𝑏𝑖𝑙𝑙𝑖𝑜𝑛
= $𝟏𝟔𝟏𝒃𝒊𝒍𝒍𝒊𝒐𝒏
The output gap is positive, so in the first quarter of 2009 the economy had an expansionary gap
Question 05 (5 marks)
Describe the sequence of a typical business cycle, beginning with an expansion and ending with an
expansion. Also show them graphically
A. A business cycle begins with an expansion (when real GDP increases) which eventually reaches a
peak (highest point) followed by a contraction (when real GDP decreases). The lowest point of real
GDP, before expansion begins again, is called the trough of the business cycle. A contraction that
lasts for two or more successive quarters is called a recession.
Question 06
If real GDP per person was $50 000 last year and increases to $52 000 this year, what is the annual
economic growth rate?
B. The growth rate = (real GDP per person this year — real GDP per person last year) ÷ real GDP per
person last year × 100 = ($52 000 — $50 000) ÷ $50 000 × 100 = 4 percent.
ECON100; Sample Final Exam 13
Spring 2013
Question 07
Deflation lowers the cost of living. Why, then, do economists consider it worse than low inflation
for the economy in general and for you in particular?
A. Falling prices (deflation) can lead consumers to postpone spending, causing economic
contraction and increasing unemployment. Deflation also hurts borrowers — consumers and
businesses — because both consumers’ incomes and business revenues are falling. Consumers
and businesses have less ability to pay back loans, whose dollar amounts do not change. For
these reasons, deflation is worse than low inflation. If you, as a consumer, have loans, you will
have a harder time paying them back. You also are likely to put off spending, hoping that prices
will continue to fall
Question 08
Describe the difference between demand-pull inflation and cost-push inflation.
A. With demand-pull inflation, rising average prices are caused by increases in demand. During
expansions, demand is the key force causing shortages and pulling up prices for inputs (like
wages) and for outputs. With cost-push inflation, rising average prices are caused by decreases in
supply. A decrease in supply caused by increasing costs is the key force pushing up output prices.
Question 09
Explain the difference between a change in aggregate quantity demanded and a change in
aggregate demand. Identify five positive demand shocks that increase aggregate demand.
A. A change in aggregate quantity demanded — the quantity of real GDP macroeconomic players
plan to demand — is caused by a change in the average price level. A change in aggregate
demand, planned spending as the sum of C + I + G + X — IM, is caused by demand shocks. Five
positive demand shocks are more optimistic expectations, falling interest rates, increased
government spending on products/services, increasing GDP in the rest of the world, and a falling
value of the Canadian dollar.
Question 10
If consumers choose to start saving more, explain how the market for loanable funds can rescue
Say’s Law.
A. If consumers start saving more, Say’s Law seems to be threatened since all income earned in
input markets is not spent demanding products/services in output markets. But if banks loan out
savings to businesses who use it for investment spending, that offsets consumer savings,
restoring equality between aggregate income (supply) and aggregate spending (demand).
(Show graphically)
Question 11
Describe the role of animal spirits in the “No” camp explanation of volatile expectations for
investors.
A. The “No” camp believes expectations for investors are volatile because there is fundamental
uncertainty about the future and because investment decisions are easily postponed. This
uncertainty leads investors to rely on the quickly changeable “herd mentality” of other investors.
Investment decisions are based on animal spirits — a gut-level instinct to act.
ECON100; Sample Final Exam 14
Spring 2013
Question 12
Define the two official measures of the money supply in Canada
A. M1 consists of currency in circulation (government issued paper bills and coins) and demand
deposits. M2 — a broader measure of the money supply — consists of all of M1 plus other
deposits like savings accounts and guaranteed investment certificates (GICs).
Question 13
List two ways that the interest rate is the price of money
A. The interest rate is the price, or opportunity cost, of holding money — what you give up by not
holding your wealth as bonds which pay interest. The interest rate is also the price you pay to
borrow money. If the interest rate is 5 percent, to borrow $100 for a year you have to pay $105
back at the end of the year; the original $100 plus $5 in interest.
Question 14
Explain how interest rates and bond prices are related using an example. What characteristic of
bonds causes this relation?
A. Interest rates and bond prices are inversely related; when one goes down, the other goes up.
Suppose the original value of a bond is $1000 and the bond promises to pay $40 each year. The
interest rate on the bond is $40 ÷ $1000 = 0.04 = 4 percent. If the market price of the bond on the
bond market falls to $800, then the interest rate on the bond is $40 ÷ $800 = 0.05 = 5 percent. A
fall in the price of the bond causes a rise in the interest rate. The characteristic of bonds that
causes this inverse relation is the fixed dollar amount that bonds promise to pay in addition to the
original value. Bonds do not promise a fixed interest rate, they promise a fixed dollar amount
paid regularly.
Question 15
If you have bought a bond as an investment, which way do you hope interest rates will move?
Explain how you will profit from your investment if interest rates move in the direction you hope
A. Once you have bought a bond, the regular interest payments are fixed. The only way you can
make or lose additional money is if the market price of the bond changes. You hope interest rates
will fall, causing the market price of your bond to rise. You can then sell the bond for more
money than you paid for it.