Suppose That We Illustrate Demand and Supply with Quantity on the Horizontal

question 30

Multiple Choice

Suppose that we illustrate demand and supply with quantity on the horizontal axis and price on the vertical axis. Let demand be a function of price and income, Q^d (P, I) . Which of the following statements is true?

• A) A change in income will cause a shift in the supply curve.
• B) A change in income level is represented by a movement along the demand curve.
• C) Income is not represented on one of the axes, and so is treated as an exogenous variable in the graphical analysis.
• D) Price and income together must change in order to create a shift in the demand curve.

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Definitions:

Expected Capital Gains Yield

The anticipated rate of return from an investment due to an increase in its market price.

Reinvestment Rate Risk

Occurs when a short-term debt security must be “rolled over.” If interest rates have fallen, the reinvestment of principal will be at a lower rate, with correspondingly lower interest payments and ending value.

High-Coupon Bonds

Bonds that offer a higher-than-average interest rate (coupon) compared to others in the market, reflecting potentially higher risk.

Low-Coupon Bonds

Low-Coupon Bonds are bonds that have a lower interest rate than the prevailing market interest rate, typically making them sell at a discount to their face value.