Assess whether each choice is correct or not. If incorrect, explain what makes it incorrect and suggest a correct statemet. 1. Under the Pure Expectations Theory, if these investors believe that interest rates will rise in the near future, A. they will invest their funds mostly in the short-term risk-free securities so that they can soon reinvest their funds in securities that offer higher yields after interest rates increase. B. The large supply of funds in the short-term market will force annualized yields down, while the reduced supply of long-term funds forces long-term yields up. C. their actions cause funds to flow into the short-term market and away from the long-term market. D. they will make up for the lower short-term yield when the short-term securities mature, and they reinvest at a higher rate (if interest rates rise) at maturity. 2. Assess the following statements: A. Regardless of the interest rate forecast (stable, increase, decrease), the yield curve is affected in a similar manner by the liquidity premium. B. The preference for the more liquid short-term securities places downward pressure on the slope of a yield curve. C. Short-term securities are normally considered to be more liquid because they are more likely to be converted to cash without a loss in value. 3. Assess the following statements: A. Government demand for loanable funds increases when planned expenditures are not covered by incoming revenues and when interest rate decreases. B. Business investment in new projects should be greater when interest rates are low, as the cost of financing potential projects should be low. Consequently, businesses will demand a greater quantity of loanable funds at a given point in time if interest rates are lower. C. At any moment in time, households (in aggregate) demand a greater quantity of loanable funds at lower rates of interest; in other words, they are willing to borrow more money at lower interest rates. D. A country's demand for foreign funds depends on the interest rate differential between the two. 4. Assess the following statements: A. At interest rate above the equilibrium, there is a surplus of loanable funds. B. Economic growth puts upward pressure on interest rates by shifting demand for loanable funds inward C. If the increased expansion by businesses leads to more income for construction crews and other workers, the quantity of savings (loanable funds supplied) could increase regardless of the interest rate, causing an outward shift in the supply schedule. D. Inflation puts downward pressure on interest rates by shifting supply of funds inward and demand for funds outward. 5. Assess the following statements: A. According to the term structure of interest rates, an upward-sloping yield curve generally results from expectation of higher interest rates, whereas a downward-sloping yield curve generally results from expectation of lower interest rates. B. the term structure of interest rates depends on interest rate expectations, investor preferences for liquidity, and the unique needs of investors and borrowers in each maturity market. C. securities with shorter maturities have greater liquidity and, therefore, should not have to offer as high a yield as do securities with longer terms to maturity. 6. Assess the following statements: A. The forward rate is commonly used to represent the market's forecast of the future interest rate. B. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve. C. Based on the expectations theory of the term structure of interest rates, a flat or inverted yield curve is most commonly interpreted to signal that that the economy will strengthen in the near future. D. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it. 7. Inflation causes the demand curve for loanable funds to shift to the left and causes the supply curve to shift to the right. 8. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place downward pressure on the demand for long-term funds issued by borrowers and the yield curve will be downward sloping. 9. Assess the following statements: A. The supply-of-loanable-funds schedule (also called the supply curve) is upward sloping. B. If interest rates were extremely high at a given point in time, DA (aggregate demand) would likely exceed SA (aggregate supply) because the low interest rate would be appealing to borrowers, but not to savers. C. The supply-of-loanable-funds schedule (also called the supply curve) is upward sloping. D. The slope of the aggregate supply curve is steep which means that it is interest-elastic

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1 Choice A is correct under the Pure Expectations Theory Investors would prefer shortterm riskfree s... View the full answer