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Questions and Answers
Interest rates are expressed as a percentage of the interest amount.
Interest rates are expressed as a percentage of the interest amount.
False
The demand for bonds increases when interest rates decrease.
The demand for bonds increases when interest rates decrease.
True
The supply and demand analysis is used to examine changes in the stock market.
The supply and demand analysis is used to examine changes in the stock market.
False
The theory of asset demand is developed to understand the supply curve for bonds.
The theory of asset demand is developed to understand the supply curve for bonds.
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An increase in wealth leads to a decrease in the quantity of an asset demanded.
An increase in wealth leads to a decrease in the quantity of an asset demanded.
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The determinants of asset demand include only three factors: wealth, expected return, and interest rate.
The determinants of asset demand include only three factors: wealth, expected return, and interest rate.
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The expected return measures how much someone loses from holding an asset.
The expected return measures how much someone loses from holding an asset.
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Assets include only money, bonds, and stocks.
Assets include only money, bonds, and stocks.
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An increase in the riskiness of bonds causes the demand curve to shift to the right.
An increase in the riskiness of bonds causes the demand curve to shift to the right.
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If more people started trading in the bond market, the demand curve would shift to the left.
If more people started trading in the bond market, the demand curve would shift to the left.
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When the supply of bonds increases, the supply curve shifts to the left.
When the supply of bonds increases, the supply curve shifts to the left.
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A decrease in the riskiness of alternative assets would lead to a decrease in the demand for bonds.
A decrease in the riskiness of alternative assets would lead to a decrease in the demand for bonds.
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An increase in the volatility of prices in the stock market would make bonds less attractive.
An increase in the volatility of prices in the stock market would make bonds less attractive.
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When the economy is growing rapidly, the supply of bonds decreases.
When the economy is growing rapidly, the supply of bonds decreases.
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Increased liquidity of alternative assets would increase the demand for bonds.
Increased liquidity of alternative assets would increase the demand for bonds.
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A decrease in the expected profitability of investment opportunities would increase the supply of bonds.
A decrease in the expected profitability of investment opportunities would increase the supply of bonds.
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The assumption of a fixed money supply complicates the analysis of the relationship between liquidity preference and interest rates.
The assumption of a fixed money supply complicates the analysis of the relationship between liquidity preference and interest rates.
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Different interest rates are charged for different financial assets.
Different interest rates are charged for different financial assets.
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The demand for money for transactionary and precautionary motives is interest-elastic.
The demand for money for transactionary and precautionary motives is interest-elastic.
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Only some economic agents participate in speculation.
Only some economic agents participate in speculation.
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The short-term interest rate is determined by the supply and demand for goods and services.
The short-term interest rate is determined by the supply and demand for goods and services.
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The assumption of a fixed money supply helps to isolate the effects of changes in liquidity preference on interest rates.
The assumption of a fixed money supply helps to isolate the effects of changes in liquidity preference on interest rates.
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The demand for money for speculative motives is affected by changes in income.
The demand for money for speculative motives is affected by changes in income.
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The liquidity preference theory assumes that people hold money only for transactionary and precautionary motives.
The liquidity preference theory assumes that people hold money only for transactionary and precautionary motives.
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During a recession, the supply of bonds increases, shifting the supply curve to the right.
During a recession, the supply of bonds increases, shifting the supply curve to the right.
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The real interest rate is calculated by adding the nominal interest rate and the expected inflation rate.
The real interest rate is calculated by adding the nominal interest rate and the expected inflation rate.
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An increase in expected inflation decreases the supply of bonds.
An increase in expected inflation decreases the supply of bonds.
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A government deficit decreases the supply of bonds.
A government deficit decreases the supply of bonds.
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A government surplus increases the supply of bonds.
A government surplus increases the supply of bonds.
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Provincial and municipal governments do not issue bonds to finance their expenditures.
Provincial and municipal governments do not issue bonds to finance their expenditures.
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The ceteris paribus assumption is used to analyze how supply and demand curves shift when all variables are changed.
The ceteris paribus assumption is used to analyze how supply and demand curves shift when all variables are changed.
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The real interest rate is the same as the nominal interest rate.
The real interest rate is the same as the nominal interest rate.
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During recessions, the risk premium on corporate bond rates tends to decrease.
During recessions, the risk premium on corporate bond rates tends to decrease.
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Liquidity is an attribute of a bond that has no influence on its interest rate.
Liquidity is an attribute of a bond that has no influence on its interest rate.
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Canada bonds are less liquid than corporate bonds.
Canada bonds are less liquid than corporate bonds.
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When a corporate bond becomes less liquid, its demand curve shifts rightward.
When a corporate bond becomes less liquid, its demand curve shifts rightward.
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The spread between the interest rates on Canada bonds and corporate bonds tends to decrease when corporate bonds become less liquid.
The spread between the interest rates on Canada bonds and corporate bonds tends to decrease when corporate bonds become less liquid.
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The risk premium on corporate bonds is unaffected by the rate of business failures and defaults.
The risk premium on corporate bonds is unaffected by the rate of business failures and defaults.
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More liquid bonds have higher interest rates.
More liquid bonds have higher interest rates.
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The theory of asset demand indicates that the demand for an asset increases when its liquidity decreases.
The theory of asset demand indicates that the demand for an asset increases when its liquidity decreases.
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Study Notes
Interest Rates and the Economy
- Interest rates refer to the cost of borrowing money or the reward for lending money, typically expressed as a percentage of the principal amount.
- Interest rates play a fundamental role in the economy, influencing various financial decisions and economic activities.
Determinants of Asset Demand
- Wealth: An increase in wealth leads to an increase in the quantity of an asset demanded.
- Expected Return: The expected return measures the gain from holding an asset and affects the demand for it.
- Risk: An increase in the riskiness of an asset causes the demand for it to fall and the demand curve to shift to the left.
- Liquidity: An increase in the liquidity of an asset causes the demand for it to rise and the demand curve to shift to the right.
Shifts in the Supply of Bonds
- Expected Profitability of Investment Opportunities: An increase in expected profitable investment opportunities leads to an increase in the supply of bonds, causing the supply curve to shift to the right.
- Expected Inflation: An increase in expected inflation causes the supply of bonds to increase and the supply curve to shift to the right.
- Government Activities: An increase in government deficits leads to an increase in the supply of bonds, causing the supply curve to shift to the right.
The Interest Rate Determination
- The short-term interest rate is determined by the supply and demand for money.
- The liquidity preference and money supply affect the interest rate.
The Effect of Liquidity on Interest Rates
- Liquidity: A liquid asset is one that can be quickly and cheaply converted into cash if needed.
- The more liquid an asset is, the more desirable it is.
- Canada bonds are the most liquid of all long-term bonds, making them the easiest to sell quickly and at a low cost.
- Corporate bonds are less liquid, making them less desirable and increasing their interest rates.
- A decrease in the liquidity of an asset leads to a fall in its demand, causing its interest rate to rise.
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Description
Learn about the concept of interest rates, their role in the economy, and how they are determined. Understand the impact of interest rates on financial decisions and economic activities.
