ESTUDYR
ECO4223 EXAM 2 MOST TESTED QUESTIONS AND ANSWERS
GRADED A+ WITH RATIONALES
During a recession, the supply of bonds______, and the supply curve shifts to the___________,
everything else held constant.
A. increases; right
B. decreases; left
C. increases; left
D. decreases; right
Rationale: Firms and governments issue fewer bonds when economic activity slows, reducing supply
and shifting the curve left.
In the bond market, the market equilibrium shows the market-clearing ________ and market-
clearing ________.
A. price; interest rate
B. price; deposit
C. interest rate; premium
D. interest rate; deposit
Rationale: Equilibrium determines the bond price at which quantity supplied equals quantity demanded
and the corresponding yield.
Everything else held constant, when stock prices become less volatile, the demand curve for bonds
shifts to the _________, and the interest rate ________________.
A. right; rises
B. left; falls
C. left; rises
D. right; falls
Rationale: Lower equity risk makes bonds relatively more attractive, increasing demand (shift right) and
driving yields down.
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds
________, and the interest rate ________, everything else held constant.
A. decreases, increases, rises
B. decreases, decreases, falls
C. increases, increases, rises
D. increases, decreases, falls
Rationale: Higher expected inflation erodes real returns, reducing demand; issuers supply more to cover
higher costs, pushing yields up.
During business cycle expansions when income and wealth are rising, the demand for bonds
__________ and the demand curve shifts to the ____________, everything else held constant.
A. falls; left
,ESTUDYR
B. rises; right
C. falls; right
D. rises; left
Rationale: As wealth grows, investors buy more assets including bonds, shifting demand right and
lowering yields.
When the expected inflation rate increases, the real cost of borrowing ______ and bond supply,
everything else held constant.
A. increases, decreases
B. decreases, increases
C. increases, increases
D. decreases, decreases
Rationale: With higher inflation expectations, borrowers repay with cheaper dollars, so they issue more
bonds, increasing supply.
If the nominal rate of interest is 2 percent and the expected inflation rate is –10 percent, the real
rate of interest is:
A. 12 percent
B. 2 percent
C. 8 percent
D. 10 percent
Rationale: Real rate ≈ nominal – inflation = 2% – (–10%) = 12%.
The supply curve for bonds has the usual upward slope indicating that as price ________, ceteris
paribus, the _________ increases.
A. falls; quantity supplied
B. rises; supply
C. rises; quantity supplied
D. falls; supply
Rationale: A higher bond price (lower yield) makes issuance more attractive to sellers, raising the
quantity supplied.
When the inflation rate is expected to increase, the ________ for bonds falls, while the
___________ curve shifts to the right, everything else held constant.
A. demand, demand
B. supply, supply
C. demand, supply
D. supply, demand
Rationale: Expected inflation lowers bond demand and increases issuance, shifting demand left and
supply right.
An increase in government budget deficits, financed by bond issuance, shifts the supply curve of
bonds to the _________ and the equilibrium interest rate ________, ceteris paribus.
, ESTUDYR
A. left; falls
B. right; rises
C. left; rises
D. right; falls
Rationale: Deficit financing adds to bond supply, shifting supply right and raising yields to clear the
market.
A central bank’s open-market purchase of government bonds causes the supply of bonds in the
public market to ________, shifting the supply curve to the ________, and the interest rate ________.
A. increase; right; rises
B. decrease; left; falls
C. increase; left; falls
D. decrease; right; rises
Rationale: When the Fed buys bonds, fewer remain available publicly (supply falls), shifting supply left
and lowering yields.
When risk aversion among investors increases, the demand for safe government bonds ________
and the demand curve shifts to the ________, everything else held constant.
A. falls; left
B. rises; right
C. rises; left
D. falls; right
Rationale: Flight-to-quality leads investors to buy more government bonds, boosting demand and
reducing yields.
If corporate bond credit ratings are downgraded across the board, the demand for corporate bonds
________ and the demand curve shifts to the _______, everything else held constant.
A. rises; right
B. falls; left
C. falls; right
D. rises; left
Rationale: Lower credit quality makes corporate bonds less attractive, reducing demand and increasing
yields.
When stock market returns outperform bond returns, the demand for bonds ________ and yields
________, ceteris paribus.
A. increases; rises
B. decreases; rises
C. decreases; falls
D. increases; falls
Rationale: Higher equity returns draw investors away from bonds, lowering bond prices and raising
yields.
ECO4223 EXAM 2 MOST TESTED QUESTIONS AND ANSWERS
GRADED A+ WITH RATIONALES
During a recession, the supply of bonds______, and the supply curve shifts to the___________,
everything else held constant.
A. increases; right
B. decreases; left
C. increases; left
D. decreases; right
Rationale: Firms and governments issue fewer bonds when economic activity slows, reducing supply
and shifting the curve left.
In the bond market, the market equilibrium shows the market-clearing ________ and market-
clearing ________.
A. price; interest rate
B. price; deposit
C. interest rate; premium
D. interest rate; deposit
Rationale: Equilibrium determines the bond price at which quantity supplied equals quantity demanded
and the corresponding yield.
Everything else held constant, when stock prices become less volatile, the demand curve for bonds
shifts to the _________, and the interest rate ________________.
A. right; rises
B. left; falls
C. left; rises
D. right; falls
Rationale: Lower equity risk makes bonds relatively more attractive, increasing demand (shift right) and
driving yields down.
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds
________, and the interest rate ________, everything else held constant.
A. decreases, increases, rises
B. decreases, decreases, falls
C. increases, increases, rises
D. increases, decreases, falls
Rationale: Higher expected inflation erodes real returns, reducing demand; issuers supply more to cover
higher costs, pushing yields up.
During business cycle expansions when income and wealth are rising, the demand for bonds
__________ and the demand curve shifts to the ____________, everything else held constant.
A. falls; left
,ESTUDYR
B. rises; right
C. falls; right
D. rises; left
Rationale: As wealth grows, investors buy more assets including bonds, shifting demand right and
lowering yields.
When the expected inflation rate increases, the real cost of borrowing ______ and bond supply,
everything else held constant.
A. increases, decreases
B. decreases, increases
C. increases, increases
D. decreases, decreases
Rationale: With higher inflation expectations, borrowers repay with cheaper dollars, so they issue more
bonds, increasing supply.
If the nominal rate of interest is 2 percent and the expected inflation rate is –10 percent, the real
rate of interest is:
A. 12 percent
B. 2 percent
C. 8 percent
D. 10 percent
Rationale: Real rate ≈ nominal – inflation = 2% – (–10%) = 12%.
The supply curve for bonds has the usual upward slope indicating that as price ________, ceteris
paribus, the _________ increases.
A. falls; quantity supplied
B. rises; supply
C. rises; quantity supplied
D. falls; supply
Rationale: A higher bond price (lower yield) makes issuance more attractive to sellers, raising the
quantity supplied.
When the inflation rate is expected to increase, the ________ for bonds falls, while the
___________ curve shifts to the right, everything else held constant.
A. demand, demand
B. supply, supply
C. demand, supply
D. supply, demand
Rationale: Expected inflation lowers bond demand and increases issuance, shifting demand left and
supply right.
An increase in government budget deficits, financed by bond issuance, shifts the supply curve of
bonds to the _________ and the equilibrium interest rate ________, ceteris paribus.
, ESTUDYR
A. left; falls
B. right; rises
C. left; rises
D. right; falls
Rationale: Deficit financing adds to bond supply, shifting supply right and raising yields to clear the
market.
A central bank’s open-market purchase of government bonds causes the supply of bonds in the
public market to ________, shifting the supply curve to the ________, and the interest rate ________.
A. increase; right; rises
B. decrease; left; falls
C. increase; left; falls
D. decrease; right; rises
Rationale: When the Fed buys bonds, fewer remain available publicly (supply falls), shifting supply left
and lowering yields.
When risk aversion among investors increases, the demand for safe government bonds ________
and the demand curve shifts to the ________, everything else held constant.
A. falls; left
B. rises; right
C. rises; left
D. falls; right
Rationale: Flight-to-quality leads investors to buy more government bonds, boosting demand and
reducing yields.
If corporate bond credit ratings are downgraded across the board, the demand for corporate bonds
________ and the demand curve shifts to the _______, everything else held constant.
A. rises; right
B. falls; left
C. falls; right
D. rises; left
Rationale: Lower credit quality makes corporate bonds less attractive, reducing demand and increasing
yields.
When stock market returns outperform bond returns, the demand for bonds ________ and yields
________, ceteris paribus.
A. increases; rises
B. decreases; rises
C. decreases; falls
D. increases; falls
Rationale: Higher equity returns draw investors away from bonds, lowering bond prices and raising
yields.
