monetary theory and policy topic 2

What is the equation of exchange?

• MV = PT

• MC = PT

• MC = PC

• MV = PC

What is the theory that assumes bonds of different maturities are perfect substitutes?

• Expectations Theory

• Liquidity Premium Theory

• Portfolio Theory

• Segmented Markets Theory

What is the key assumption of the Segmented Markets Theory?

• Bonds of different maturities are not perfect substitutes

• Bonds of different maturities are not substitutes at all

• Markets are completely segmented

• Bonds of different maturities are perfect substitutes

What does the Liquidity Premium Theory modify from the Expectations Theory?

• Average of future short rates as determinant of long rate

• Bonds of different maturities are perfect substitutes

• Bonds of different maturities are not substitutes at all

• Interest rate at each maturity is determined separately

What does an inverted yield curve indicate?

• A recession is imminent

• The economy is in a state of transition

• The economy is stable

• Investors expect the economy to grow rapidly

What is the implication of a humped yield curve?

• Investors receive a higher yield for purchasing longer-term bonds

• Investors expect the economy to slow or decline in the future

• Investors have little confidence in the economy

• Investors are uncertain about specific economic policies or conditions

What is the term structure of interest rates?

• The relation between the interest rate of a bond and the expected changes in the price level

• The relation between the interest rate of a bond and the expected changes in the price level

• The relation between the interest rate of a bond and the time until the bond matures

• The relation between the interest rate of a bond and the price level

What is the effect of a decrease in liquidity on the yield curve?

• Steep upward slope

• Flat slope

• Downward slope

• Humped shape

What is the effect of an increase in information costs on the yield curve?

• Steep upward slope

• Downward slope

• Humped shape

• Flat slope

What does the Expectations Theory explain?

• All of the above

• Why yield curve has different slopes

• Why yield curves tend to have steep slope when short rates are low

• Why yield curve is usually upward sloping