Question

The liquidity effect:

1)	refers to the initial short-term effect of a decrease in the money supply when interest rates rise

2)	refers to the initial short-run effect of an increase in the money supply on interest rates

3)	decreases the amount of excess cash individuals hold when interest rates drop

4)	has no effect on the demand for bonds

In the equation of exchange:

1)	M = marginal revenue, V = velocity of trade. P = price level, T = trade value

2)	M = money, V = volume of trade, P = price level, T = Time value of money

3)	M = market yield, V = variability of circumstances, P = population growth, T time value of money

4)	M = money supply, V = velocity of circulation, P = general price level, T = volume of trade

Interest rate risk is best described by:

1)	the risk of choosing the wrong interest rate

2)	the risk of having a bond that may not trade in a liquid market

3)	values of bonds with longer maturities change more than those with shorter maturities when interest rates change

4)	longer-term bonds are priced higher to yield more than shorter-term bonds

By issuing short-term deposits and investing in long-term, fixed-rate mortgages, financial institutions place most of the interest rate risk on the mortgage borrower.

	1) True
	2) False

Answer 1

The liquidity effect: refers to the initial short-term effect of a decrease in the money supply when interest rates rise (option 1)

In the equation of exchange:M = money supply, V = velocity of circulation, P = general price level, T = volume of trade (Option 4)

Interest rate risk is best described by: values of bonds with longer maturities change more than those with shorter maturities when interest rates change (option 3)

By issuing short-term deposits and investing in long-term, fixed-rate mortgages, financial institutions place most of the interest rate risk on the mortgage borrower. TRUE