ECON350 Tue or False Practice Questions (week 5) 1. It is often the case that purchasing...

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ECON350 Tue or False Practice Questions (week 5)
1. It is often the case that purchasing a five-year bonds orfive one-year bonds always results in the same returns, henceinvestors are indifferent between these two options.
2. The YC under the liquidity premium theory is normally upwardsloping, but it might kink downward at the very long end ofmaturity.
3. As debtors are more sensitive to interest rate changes thancreditors, higher interest rates would lead to a negative net cashflow.
4. In conducting Open Market Operations, the Reserve Bank ofAustralia buys or sells only short-dated commonwealth governmentsecurities.
5. Central banks conduct their micro function via the regulationand supervision, and the lender of last resort facility.
6. On most days, the RBA conducts OMO to keep the cash rate inthe overnight market near the target cash rate.
7. As banks in Australia are required to hold an ES account atthe RBA while no individuals or firms have such an account, achange in the target cash rate announced by the RBA will onlyaffect commercial banks, not the broader economy.
8. The RBA does not set the inflation target at zero because itbelieves that some inflation ‘greases the wheels’ for relativeprice flexibility.
9. The metaphor “A horse could be led to water, but it could notbe made to drink” implies that if the CB floods the market withliquidity to push the interest rate down, firms would increasetheir borrowings to build factories and buy machines.
10. The issue of central bank independence emerged withstagflation and the collapse of Bretton Woods system in the1970s.

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1 It is often the case that purchasing a fiveyear bonds or five oneyear bonds always results in the same returns hence investors are indifferent between these two options False Even if the bonds are otherwise similar the 5year bonds have an added component markup for maturity risk in the yield which is the premium for longer duration of the bonds Additionally the longer maturity bonds also usually have higher duration which is the sensitivity of the bond prices to the changes in interest rates Hence their risk profiles are not same and investors are not indifferent between those two 2 The YC under the liquidity premium theory is normally upward sloping but it might kink downward at the very long end of maturity False The liquidity premium theory or liquidity preference theory proposes that as the securities more illiquid the investors demand higher compensation premium for holding them all else being equal the investors prefer security with higher liquidity As the liquidity usually goes down as the maturity of bonds increases See Answer

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ECON350 Tue or False Practice Questions (week 5)1. It is often the case that purchasing a five-year bonds orfive one-year bonds always results in the same returns, henceinvestors are indifferent between these two options.2. The YC under the liquidity premium theory is normally upwardsloping, but it might kink downward at the very long end ofmaturity.3. As debtors are more sensitive to interest rate changes thancreditors, higher interest rates would lead to a negative net cashflow.4. In conducting Open Market Operations, the Reserve Bank ofAustralia buys or sells only short-dated commonwealth governmentsecurities.5. Central banks conduct their micro function via the regulationand supervision, and the lender of last resort facility.6. On most days, the RBA conducts OMO to keep the cash rate inthe overnight market near the target cash rate.7. As banks in Australia are required to hold an ES account atthe RBA while no individuals or firms have such an account, achange in the target cash rate announced by the RBA will onlyaffect commercial banks, not the broader economy.8. The RBA does not set the inflation target at zero because itbelieves that some inflation ‘greases the wheels’ for relativeprice flexibility.9. The metaphor “A horse could be led to water, but it could notbe made to drink” implies that if the CB floods the market withliquidity to push the interest rate down, firms would increasetheir borrowings to build factories and buy machines.10. The issue of central bank independence emerged withstagflation and the collapse of Bretton Woods system in the1970s.