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Test Two Flashcards

1
Q

A theory assuming that people’s expectations are the best possible forecast based on all public information, NOT ALWAYS 100% ACCURATE.

A

Rational expectations

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2
Q

if a bond is held to maturity

A

The rate of return is the yield to maturity

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3
Q

if a bond is sold before maturity

A

It’s rate of return is the current yield plus the percentage capital gain or loss

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4
Q

what happens to a bond’s price if the yield to maturity rises sharply?

A

The price falls

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5
Q

Are short-term or long-term bonds more volatile

A

Long-term

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6
Q

what risk is avoided if a bond’s time to maturity matches its holding period?

A

Interest-Rate Risk

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7
Q

The rate savers can receive with certainty

A

risk-free rate

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8
Q

what reduces the present value of future income?

A

Risk

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9
Q

payment on an asset that compensates the owner for taking risk

A

risk premium

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10
Q

risk premium _______ with the riskiness of the asset

A

increases

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11
Q

Asset prices change when?

A

When expected income or interest rates change

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12
Q

Stock prices change when?

A

expected income changes

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13
Q

changes in company earnings have what kind of effect on bond prices

A

little to no effect

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14
Q

Ex ante

A

Before (expected inflation)

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15
Q

Ex post

A

After (actual inflation)

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16
Q

what interest rate is adjusted for changes in price level and is a more accurate reflection of the cost of borrowing

A

Real interest rate

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17
Q

if inflation is higher than expected how are the ex post and ex ante real interest rates affected?

A

the ex post real interest rate is lower than the ex ante rate

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18
Q

pricing inflation cased negative ex post returns on mortgages issued by savings and loan associations resulted in what

A

the savings and loan crisis

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19
Q

what makes borrowing and lending risky

A

uncertainty about inflation

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20
Q

what type of bonds promise a fixed real interest rate: the nominal rate is adjusted for inflation over the life of the bond

A

inflation-indexed bonds

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21
Q

how are inflation-indexed bonds effected by inflation increases

A

The nominal interest rate on the bond is increased by and equal percentage

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22
Q

what are the fundamental forces determining interest rates

A
  • Time preference
  • marginal product of capital
  • income
  • inflation expectations
  • monetary policy
  • federal budget deficits (surpluses)
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23
Q

What 2 motives determine the shape of indifference curves

A

Current consumption & deferred current consumption

24
Q

higher income shifts the budget constraint out leading to

A

higher savings

25
what is the reward to saving?
Interest rates. Productivity of capital is the source of that reward
26
how does a fall in marginal product of capital affect the demand curve for loanable funds
The demand curve shifts to the left
27
income fall can have a ____________ effect on interest rates
positive the supply curve of loanable funds shifts to the left
28
during a recession which curve has the greater shift
demand curve
29
a rapid increase in asset prices not justified by a change in interest rate or expected asset income
asset-price bubble
30
are bonds or stock prices more volatile
Stocks, they provide income farther into the future than bonds.
31
the price of a stock divided by earnings over the recent past
price-earnings ratio
32
what increases p/e ratio?
low interest rates and high expected earnings in the future
33
what happens to interest rates during periods which people expect inflation to increase
interest rates rise
34
what happens to interest rates when people expect inflation to decline
interest rates typically fall
35
_____ require that the exchange shuts down temporarily if prices drop by a certain percentage
Circuit breakers (established following 1987 crash)
36
circuit breakers stop what type of selling
panic selling
37
to stimulate the economy the fed implements measures that:
- encourage banks to expand loans - thereby boosting the money supply moving the supply curve of loanable funds rightward - thereby reducing interest rates
38
to restrain economic activities the fed implements actions that:
- force banks to reduce their lending - thereby curtailing the money supply, moving the supply curve of loanable funds leftward - thus increasing interest rates
39
does the fed res. have a considerably more direct influence on short-term interest rate or long-term rates
Short-term
40
What effect does a federal budget deficit have on the demand curve
A right ward shift therefore a increase in interest rates
41
What proposition suggests that people will offset fiscal deficits with greater savings to pay future taxes, especially if the increase in gov spending is expected to be permanent
The Ricardian Equivalance
42
The total resouces owned by individuals including all assets
Wealth
43
the degree of uncertainty associated with the return on one asset relative to alternative assets
Risk
44
the ease and speed with which an asset can be turned into cash relative to alternative assets
Liquidity
45
wealth and quantity demanded have what kind of relationships
Positive
46
expected return and quantity demanded have what kind of relationship
positive
47
quantity demanded and risk are _____ related
negatively related
48
quantity demanded and liquidity
positively related
49
sources of supply:
- personal saving - business saving - government budge surplus - foreign lending in the US
50
Sources of Demand
- household credit purchases - Business investment spending - government budget deficit - foreign borrowing in the us
51
what occurs when the amount demanded equals the amount supplied at a given price
market equilibrium
52
supply curve shifters
- expected profitability of investment opportunities - expected inflation - government budget
53
a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right
Income Effect
54
a rise in the price level causes the demand for money at each interest rate to increase and the demand curve to shift to the right
Price-Level Effect
55
an increase in the money supply will lower interest rates refers to what effect?
Liquidity
56
what are the goals of monetary policy
- keep stable prices (low/in volatile inflation) | - maximize employment (increase output

money and banking (1 decks)

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