Question 1

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the A)liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. B)liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. C)liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. D)liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

Accepted Answer

The answer of Use the following figure to answer the...

Question 2

The riskiness of an asset that is unique to the particular asset is
A)systematic risk.
B)portfolio risk.
C)investment risk.
D)nonsystematic risk.

Accepted Answer

Nonsystematic risk, also known as specific risk or idiosyncratic risk, is the risk associated with a specific investment and is not related to market movements. It is unique to that particular asset and can be mitigated through diversification.

Question 3

A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio.
A)alpha
B)beta
C)CAPM
D)APT

Accepted Answer

Beta is a measure of an asset's systematic risk or market risk, which is a measure of how much an asset's return fluctuates with changes in the market. A higher beta means the asset's return is more sensitive to changes in the market portfolio. Alpha, CAPM, and APT are not measures of an asset's sensitivity to changes in the market portfolio.

Question 4

Use the following figure to answer the questions :

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the
A)liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B)liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C)liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D)liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

Accepted Answer

The answer of Use the following figure to answer the...

Question 5

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.
A)larger; fast
B)larger; slow
C)smaller; slow
D)smaller; fast

Accepted Answer

The liquidity effect suggests that an increase in the money supply will initially lower interest rates. If the liquidity effect is larger than other effects (such as the income and price expectations effects) and there is slow adjustment of expected inflation, interest rates will fall immediately. Fast adjustment of expected inflation would counteract the liquidity effect by increasing interest rates in anticipation of inflation.

Question 6

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the
A)interest rate will fall.
B)interest rate will rise.
C)interest rate will fall immediately below the initial level when the money supply grows.
D)interest rate will rise immediately above the initial level when the money supply grows.

Accepted Answer

The answer of If the liquidity effect is smaller than...

Question 7

Interest rates increased continuously during the 1970s.The most likely explanation is
A)banking failures that reduced the money supply.
B)a rise in the level of income.
C)the repeated bouts of recession and expansion.
D)increasing expected rates of inflation.

Accepted Answer

Increasing expected rates of inflation.

Question 8

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the A)Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B)liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C)liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D)Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Accepted Answer

The answer of Use the following figure to answer the...

Question 9

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.

Accepted Answer

The statement suggests that the liquidity effect and adjustment to expected inflation are both weaker factors affecting interest rates. If money growth increases, however, the overall effect will be an upward pressure on interest rates, meaning that the interest rate will initially fall but eventually climb above the initial level. Therefore, choice C is the best answer.

Question 10

Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?

Accepted Answer

The answer of Using the liquidity preference framework,what will happen...

Question 11

Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return
A)when it has a greater systematic risk.
B)when it has a greater risk in isolation.
C)when it has a lower systematic risk.
D)when it has a lower systematic risk and a lower risk in isolation.

Accepted Answer

Both the CAPM and APT suggest that an asset's expected return should increase as its systematic risk increases. This is because systematic risk cannot be diversified away, so investors demand compensation for bearing it. Therefore, assets with higher systematic risk should have higher expected returns according to both the CAPM and APT.

Question 12

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the A)Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B)liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C)liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D)Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Accepted Answer

The answer of Use the following figure to answer the...

Question 13

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the A)liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. B)liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. C)liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. D)liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

Accepted Answer

The figure shows an upward shift in the money supply curve from MS1 to MS2, leading to a new equilibrium point at E2 where interest rates increase from i1 to i2, and output increases from Y1 to Y2. This implies that there is a larger liquidity effect than the expected inflation effect. Additionally, the figure shows a relatively small shift in the aggregate demand curve from AD1 to AD2, which suggests that interest rates adjust slowly to changes in expected inflation. Therefore, the correct answer is option C.

Question 14

The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio.
A)systematic
B)nonsystematic
C)portfolio
D)investment

Accepted Answer

Systematic risk, also known as market risk, affects the overall market and cannot be eliminated through diversification. A well-diversified portfolio's risk is primarily dependent on this type of risk, as nonsystematic risk, specific to individual investments, can be largely diversified away.

Question 15

The ________ the returns on two securities move together,the ________ benefit there is from diversification.
A)less; more
B)less; less
C)more; more
D)more; greater

Accepted Answer

The less the returns on two securities move together (i.e. the lower the correlation between their returns), the more benefit there is from diversification. This is because diversification allows an investor to lower their overall portfolio risk by combining assets that have low or negative correlations, which helps to smooth out overall returns and reduce the impact of any single asset's or market's movements.

Question 16

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

Accepted Answer

The answer of Using the liquidity preference framework,show what happens...

Question 17

The riskiness of an asset is measured by
A)the magnitude of its return.
B)the absolute value of any change in the asset's price.
C)the standard deviation of its return.
D)risk is impossible to measure.

Accepted Answer

The standard deviation of an asset's return measures the extent to which its returns vary from its average return. A higher standard deviation implies a riskier asset because there is a greater chance for large losses or gains. Therefore, option C is the correct answer as it measures riskiness.

Question 18

If the Fed wants to permanently lower interest rates,then it should raise the rate of money growth if
A)there is fast adjustment of expected inflation.
B)there is slow adjustment of expected inflation.
C)the liquidity effect is smaller than the expected inflation effect.
D)the liquidity effect is larger than the other effects.

Accepted Answer

When the Fed wants to permanently lower interest rates, raising the rate of money growth can be effective if the liquidity effect (the immediate impact of an increase in the money supply leading to lower interest rates) is larger than the other effects, such as the expected inflation effect. This is because the initial decrease in interest rates due to the liquidity effect can outweigh the potential increase in interest rates that might come from higher expected inflation, at least in the short term. Over time, as expectations adjust, the lower interest rates can become more entrenched.

Question 19

Use the following figure to answer the questions :

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the
A)Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.
B)liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.
C)liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.
D)Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Accepted Answer

The answer of Use the following figure to answer the...

Question 20

Holding many risky assets and thus reducing the overall risk an investor faces is called
A)diversification.
B)foolishness.
C)risk acceptance.
D)capitalization.

Accepted Answer

Diversification involves spreading your investments across a range of assets to reduce the overall risk. By holding many risky assets, the risk of any one investment negatively impacting your portfolio is reduced, thus creating a more balanced and diversified portfolio. B and C are incorrect as they do not correctly describe the act of diversification, and D is not a relevant option.

Quiz 5: The Behavior of Interest Rates

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

The riskiness of an asset that is unique to the particular asset is

A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio.

Use the following figure to answer the questions : -In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is than the other money supply effects and there is adjustment of expected inflation.

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the

Interest rates increased continuously during the 1970s.The most likely explanation is

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is slow,then the

Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?

Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio.

The the returns on two securities move together,the benefit there is from diversification.

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

The riskiness of an asset is measured by

If the Fed wants to permanently lower interest rates,then it should raise the rate of money growth if

Use the following figure to answer the questions : -In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

Holding many risky assets and thus reducing the overall risk an investor faces is called

Quiz 5: The Behavior of Interest Rates

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

The riskiness of an asset that is unique to the particular asset is

A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio.

Use the following figure to answer the questions : -In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the

Interest rates increased continuously during the 1970s.The most likely explanation is

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is slow,then the

Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?

Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio.

The ________ the returns on two securities move together,the ________ benefit there is from diversification.

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

The riskiness of an asset is measured by

If the Fed wants to permanently lower interest rates,then it should raise the rate of money growth if

Use the following figure to answer the questions : -In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

Holding many risky assets and thus reducing the overall risk an investor faces is called

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is than the other money supply effects and there is adjustment of expected inflation.

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

Use the following figure to answer the questions : -The figure above illustrates the effect of an increased rate of money supply growth at time period T₀.From the figure,one can conclude that the

The the returns on two securities move together,the benefit there is from diversification.