Chapter 5

Question 1

Wealth

Answer 1

The total resources owned by the individual, including all assets

Question 2

Expected Return

Answer 2

The return expected over the next period on one asset relative to alternative assets

Question 3

Risk

Answer 3

The degree of uncertainty associated with the return on one asset relative to alternative assets

Question 4

Liquidity

Answer 4

The ease and speed with which an asset can be turned into cash relative to alternative assets

Question 5

Theory of Portfolio Choice: the quantity demanded on an asset is:

Answer 5

1. Positively related to wealth
2. Positively related to its expected return relative to alternative assets
3. Negatively related to the risk of its returns relative to alternative assets
4. Positively related to its liquidity relative to alternative assets

Question 6

Bond Demand

Answer 6

Holding all else constant, lower prices (higher interest rates) increases the quantity demanded of bonds

Question 7

Bond Supply

Answer 7

Holding all else constant, lower prices (higher interest rates), decrease the quantity supplied of bonds

Question 8

Shifts in the demand for bonds (Wealth)

Answer 8

Growing wealth shifts the demand curve for bonds to the right

Question 9

Shifts in the demand for bonds (Expected interest rate)

Answer 9

Higher expected future interest rates shifts the demand curve to the left

Question 10

Shifts in the demand for bonds (Expected inflation)

Answer 10

An increase in the expected rate of inflations shifts the demand curve to shift to the left

Question 11

Shifts in the demand for bonds (Risk)

Answer 11

An increase in the riskiness of bonds causes the demand curve to shift to the left

Question 12

Shifts in the demand for bonds (Liquidity)

Answer 12

Increased liquidity of bonds shifts the demand curve to the right

Question 13

Shifts in the Supply of bonds (Investment opportunities)

Answer 13

Higher expected profitability of investment opportunities shift the supply curve to the right

Question 14

Shifts in the supply of bonds (Expected inflation)

Answer 14

An increase in expected inflation shifts the supply curve to the right

Question 15

Shifts in the Supply of Bonds (Government Budget)

Answer 15

Increased budget deficit shifts the supply curve to the right

Question 16

Investment (expenditure)

Answer 16

Expenditures on goods not for present consumption

Question 17

Types of Investment

Answer 17

• Inventories
• Capital goods, such as factories, machines
• Residential housing

Question 18

Income Effect (Money Demand)

Answer 18

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

Question 19

Price-Level Effect (Money Demand)

Answer 19

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

Question 20

Income Effect (Money Supply)

Answer 20

An increase in the money supply is a rise in the interest rate in response to a higher level of income

Question 21

The Price-Level Effect

Answer 21

An increase in the money supply is a rise in interest rates in response to the rise in the price level

Question 22

The Expected-Inflation Effect

Answer 22

An increase in the money supply is a rise in interest rates in response to the rise in the expected inflation rate