Chapter 5: The Economics of Interest-Rate Fluctuations
3) Government budget deficits affect the equilibrium yield on bonds due to its impact on
a) the demand for bonds.
b) the supply of bonds.
c) the supply and demand for bonds.
d) Inflation has no effect on bond yields.
6) Corporations issue more bonds if
a) their stocks are publicly traded.
b) the government runs a deficit.
c) they perceive opportunities for profitable expansion.
d) all of the above.
7) If the Federal Reserve wants to increase the equilibrium interest rate, it will _____ the
_____ money.
a) increase, demand for
b) increase, supply of
c) decrease, demand for
d) decrease, supply of
8) Which of the following affect(s) the demand for bonds?
a) real rate of return
b) household wealth
c) liquidity
d) all of the above
9) Which of the following would affect the supply of bonds?
a) expected inflation
b) profit opportunities for firms
c) government budget deficits
d) all of the above
10) Which of the following would affect the supply of bonds?
a) household wealth
b) profit opportunities for firms
c) liquidity
d) all of the above
11) Which of the following affects both the supply and demand for bonds?
a) inflation
b) liquidity
c) real return
d) federal budget deficit
13) An increase in household wealth causes the _____ bonds to shift and for equilibrium
interest rates to
a) demand for, rise.
b) demand for, fall.
c) supply of, rise.
d) supply of, fall.
14) An increase in the expected return on bonds causes the _____ bonds to shift and for
equilibrium interest rates to
a) demand for, rise.
b) demand for, fall.
c) supply of, rise.
d) supply of, fall.
15) A decrease in the government budget deficit causes the _____ bonds to shift and for
equilibrium interest rates to
a) demand for, rise.
b) demand for, fall.
c) supply of, rise.
d) supply of, fall.
Short Answer
1) What are the five reasons bond yields would fall solely due to a shift in the demand
for bonds?
an increase in wealth, return, expected interest rates, or liquidity or a decrease in
risk.
2) What are the two reasons bond yields would fall solely due to a shift in supply of
bonds?
an increase in profit opportunities, an increase in the government budget deficit
3) Stocks are perceived to be riskier. Explain how bond yields would be affected.
The relative risk of bonds would decrease, shifting the demand for bonds to the
right and lowering the equilibrium yield.
4) Large silver and copper deposits are discovered, lowering the value of those
commodities. Explain how bond yields would be affected.
The relative return of bonds would increase, shifting the demand for bonds to the
right and lowering the equilibrium yield.
5) A company that produces computers files a patent on a more efficient way to produce
motherboards. What would be the impact on the yield for that company’s bonds?
The company would be expected to issue more bonds for expansion, so the supply
of bonds would shift to the right, increasing equilibrium yields.
6) IBM announces that Hannah Montana will take over as CEO of the company. What
would be the effect on IBM’s bond yield?
The risk of the bonds would rise, raising the equilibrium yield.
7) What is the one factor that affects both the supply and demand for bonds?
expected inflation
20) The government raises taxes to pay off the debt. Explain how this might have the
effect of lowering equilibrium bond yields.
The decrease in household wealth would shift the demand for bonds, raising yield,
but the decrease in the supply of bonds from the debt reduction would tend to lower
yields.