14. Which of the following would NOT cause a shift in the willingness to lend curves?

A) A recession.

B) A decrease in marginal income tax rates.

C) A change in the current market interest rate.

D) Our unfortunate involvement in another world war.

15. If asset one is a AAA rated U.S. Treasury bond yielding 3.5% and asset two is a BBB rated corporate bond with the

same time to maturity as asset one and is yielding of 6.5%, individual investors would

A) prefer asset one.

B) prefer asset two.

C) be indifferent between the two assets.

D) require more information before choosing asset one or asset two.

16. The supply of loanable funds curve would be shifted to the left by

A) a relative decrease in expected returns on other assets.

B) a decrease in the U.S. government deficit.

C) an increase in expected inflation.

D) an increase in the liquidity of bonds relative to other assets.

17. Which of the following could be expected to cause the equilibrium interest rate to rise?

A) a decrease in government deficits. B) a decrease in the corporate tax on profits.

C) a decrease in subsidies for corporate investment. D) a decrease in expected inflation.

18. You would be less willing to purchase U.S. Treasury bonds, other things equal, if

A) you inherit $1 million from your Uncle Harry. B) you expect interest rates to fall.

C) stock prices are expected to fall. D) The U.S. tax on gold trades is reduced.

19. Interest rates typically follow a __________ pattern relative to economic activity and the default premium

typically follows a ___________ pattern relative to economic activity.

A) procyclical; procyclical B) procyclical; countercyclical

C) countercyclical; procyclical D) countercyclical; countercyclical

20. If there is an excess demand for money

A) individuals sell bonds, causing the interest rate to rise. B) individuals sell bonds, causing the interest rate to fall.

C) individuals buy bonds, causing interest rates to fall. D) individuals buy bonds, causing interest rates to rise.

21. 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 fall immediately below the initial level but eventually rise above that level.

D) interest rate will rise immediately above the initial level when the money supply grows.

22. According to the preferred habitat theory of the term structure, a slightly upward sloping yield curve indicates that short-

term interest rates are expected to

A) rise slightly in the future. B) remain unchanged in the future.

C) decline moderately in the future. D) decline sharply in the future.

23. If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent,

and 5 percent, the preferred habitat theory predicts that the bond with the highest interest rate today is the one

with a maturity of

A) one year. B) two years. C) four years. D) five years. E) unable to be determined with the information given.

24. During depressions or severe recessions, which of the following long-term bonds normally has the lowest yield

to maturity?

A) Corporate Baa bonds B) U.S. Treasury bonds C) Corporate Aaa bonds D) Municipal bonds

25. Which theory of term structure predicts that long-term yields will exceed short-term yields on average?

A) Pure expectations B) Segmented markets C) Liquidity premium D) None of the previous.

26. If the expected path of 1-year interest rates over the next five years is 1%, 3%, 5%, 7%, and 6%, the preferred habitat

theory predicts that the bond with the highest interest rate today is the one with a maturity of (careful on this one)

A) two years. B) three years. C) four years. D) five years. E) unable to be determined with the information given.