复习题+金融市场与机构

复习题

Chapter 2

Overview of the Financial System

1.Financial markets have the basic function of A

(a) bringing together people with funds to lend and people who want to borrow funds.

(b) assuring that the swings in the business cycle are less pronounced.

(c) assuring that governments need never resort to printing money.

(d) both (a) and (b) of the above.

(e) both (b) and (c) of the above.

2. Which of the following can be described as involving direct finance? E

(a) A corporation’s stock is traded in an ov er-the-counter market.

(b) People buy shares in a mutual fund.

(c) A pension fund manager buys commercial paper in the secondary market.

(d) An insurance company buys shares of common stock in the over-the-counter

markets.

(e) None of the above.

3. Which of the following can be described as involving direct finance? B

(a) A corporation’s stock is traded in an over-the-counter market.

(b) A corporation buys commercial paper issued by another corporation.

(c) A pension fund manager buys commercial paper from the issuing corporation.

(d) Both (a) and (b) of the above.

(e) Both (b) and (c) of the above.

4.Intermediaries who link buyers and sellers by buying and selling securities at stated prices are called D

(a) investment bankers.

(b) traders.

(c) brokers.

(d) dealers.

(e) none of the above.

5. An important financial institution that assists in the initial sale of securities in the primary market is the A

(a) investment bank.

(b) commercial bank.

(c) stock exchange.

(d) brokerage house.

6. Which of the following statements about financial markets and securities are true? D

(a) Most common stocks are traded over-the-counter, although the largest corporations have their shares traded at organized stock exchanges such as the New York Stock Exchange.

(b) A corporation acquires new funds only when its securities are sold in the primary market.

(c) Money market securities are usually more widely traded than longer-term securities and so tend to be more liquid.

(d) All of the above are true.

(e) Only (a) and (b) of the above are true.

7. Which of the following statements about financial markets and securities are true? C

(a) A bond is a long-term security that promises to make periodic payments called dividends to the firm’s residual claimants.

(b) A debt instrument is intermediate term if its maturity is less than one year.

(c) A debt instrument is long term if its maturity is ten years or longer.

(d) The maturity of a debt instrument is the time (term) that has elapsed since it was issued.

8. Which of the following can be described as involving indirect finance? D

A. A bank buys a U.S. Treasury bill from one of its depositors.

B. A corporation buys commercial paper issued by another corporation.

C. A pension fund manager buys commercial paper in the primary market.

D.Both A and C of the above.

9. Financial intermediaries _______D__________________________________________.

A.exist because there are substantial information and transaction costs in the economy

B.improve the lot of the small saver

C.are involved in the process of indirect finance

D.do all of the above

10. Bonds that are sold in a foreign country and are denominated in that country’s currency are known as A

(a) foreign bonds.

(b) Eurobonds.

(c) Eurocurrencies.

(d) Eurodollars.

11. Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as B

(a) foreign bonds.

(b) Eurobonds.

(c) Eurocurrencies.

(d) Eurodollars.

10. Financial intermediaries D

(a) exist because there are substantial information and transaction costs in the economy.

(b) improve the lot of the small saver.

(c) are involved in the process of indirect finance.

(d) do all of the above.

(e) do only (a) and (b) of the above.

Chapter 3

What Do Interest Rates Mean and What Is Their Role in Valuation?

12.A coupon bond pays the owner of the bond B

(a) the same amount every month until maturity date.

(b) a fixed interest payment every period and repays the face value at the maturity date.

(c) the face value of the bond plus an interest payment once the maturity date has been

reached.

(d) the face value at the maturity date.

(e) none of the above.

13.A bond’s future payments are called its A

(a) cash flows.

(b) maturity values.

(c) discounted present values.

(d) yields to maturity.

14. A credit market instrument that pays the owner the face value of the security at the

maturity date

and nothing prior to then is called a D

(a) simple loan.

(b) fixed-payment loan.

(c) coupon bond.

(d) discount bond.

15.(I) A simple loan requires the borrower to repay the principal at the maturity date along

with an interest payment. (II) A discount bond is bought at a price below its face value, and the face value is repaid at the maturity date. C

(a) (I) is true, (II) false.

(b) (I) is false, (II) true.

(c) Both are true.

(d) Both are false.

16. Which of the following are true of coupon bonds? D

(a) The owner of a coupon bond receives a fixed interest payment every year until the

maturity date, when the face or par value is repaid.

(b) U.S. Treasury bonds and notes are examples of coupon bonds.

(c) Corporate bonds are examples of coupon bonds.

(d) All of the above.

(e) Only (a) and (b) of the above.

17. If a $10,000 face value discount bond maturing in one year is selling for $5,000, then

its yield to maturity is D&C

(a) 5 percent.

(b) 10 percent.

(c) 50 percent.

(d) 100 percent.

18 If a $5,000 face value discount bond maturing in one year is selling for $5,000, then its

yield to maturity is A

(a) 0 percent.

(b) 5 percent.

(c) 10 percent.

(d) 20 percent.

19. The Fisher equation states that D

(a) the nominal interest rate equals the real interest rate plus the expected rate of

inflation.

(b) the real interest rate equals the nominal interest rate less the expected rate of

inflation.

(c) the nominal interest rate equals the real interest rate less the expected rate of

inflation.

(d) both (a) and (b) of the above are true.

(e) both (a) and (c) of the above are true.

20 If you expect the inflation rate to be 15 percent next year and a one-year bond has a

yield to maturity of 7 percent, then the real interest rate on this bond is D

(a) 7 percent.

(b) 22 percent.

(c) –15 percent.

(d) –8 percent.

(e) none of the above.

21. Which of the following $1,000 face value securities has the highest yield to maturity? C

A. A 5 percent coupon bond selling for $1,000

B. A 10 percent coupon bond selling for $1,000

C. A 12 percent coupon bond selling for $1,000

D. A 12 percent coupon bond selling for $1,100

22. If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year A

is _________.

A. $650

B. $1,300

C. $130

D. None of the above

23 If you expect the inflation rate to be 5 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is C

(a) –12 percent.

(b) –2 percent.

(c) 2 percent.

(d) 12 percent.

Chapter 4

Why Do Interest Rates Change?

24. When the price of a bond is below the equilibrium price, there is excess _________ in

the bond market and the price will _________.C&A

(a) demand; rise

(b) demand; fall

(c) supply; fall

(d) supply; rise

25 When the price of a bond is _________ the equilibrium price, there is an excess supply

of bonds and the price will _________.B

(a) above; rise

(b) above; fall

(c) below; fall

(d) below; rise

26. When the price of a bond is _________ the equilibrium price, there is an excess

demand for bonds and the price will _________.D

(a) above; rise

(b) above; fall

(c) below; fall

(d) below; rise

27. When the interest rate on a bond is above the equilibrium interest rate, there is excess

_________ in the bond market and the interest rate will _________.B

(a) demand; rise

(b) demand; fall

(c) supply; fall

(d) supply; rise

28. When the interest rate on a bond is below the equilibrium interest rate, there is excess

_________ in the bond market and the interest rate will _________.D

(a) demand; rise

(b) demand; fall

(c) supply; fall

(d) supply; rise

29.When the interest rate on a bond is _________ the equilibrium interest rate, there is excess

_________ in the bond market and the interest rate will _________.A

(a) above; demand; fall

(b) above; demand; rise

(c) below; supply; fall

(d) above; supply; rise

30. When the interest rate on a bond is _________ the equilibrium interest rate, there is

excess _________ in the bond market and the interest rate will _________.C

(a) below; demand; rise

(b) below; demand; fall

(c) below; supply; rise

(d) above; supply; fall

31.. When the demand for bonds _________ or the supply of bonds _________, interest rate rise. D

(a) increases; increases

(b) increases; decreases

(c) decreases; decreases

(d) decreases; increases

32. When the demand for bonds _________ or the supply of bonds _________, interest

rates fall. B

(a) increases; increases

(b) increases; decreases

(c) decreases; decreases

(d) decreases; increases

33 When the demand for bonds _________ or the supply of bonds _________, bond prices

rise. A

(a) increases; decreases

(b) decreases; increases

(c) decreases; decreases

(d) increases; increases

34. What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900

one year later? C

A. 5 percent

B. 10 percent

C. –5 percent

D. –10 percent

12. As the price of a bond _________ and the expected return _________, bonds become more attractive A

to investors and the quantity demanded rises.

A. falls; rises

B. falls; falls

C. rises; rises

D. rises; falls

35. Considering the following diagram. The most likely cause of the increase in the equilibrium interest rate from i1 to i2 is a(n) ________ in the ______________. A A. increase; expected inflation rate B. decrease; expected inflation rate. C. increase; government budget deficit D. decrease; government budget deficit

Chapter 5

How Do Risk and Term Structure Affect Interest Rates?

36. (I) An increase in default risk on corporate bonds shifts the demand curve for corporate

bonds to the right. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the left. D

(a) (I) is true, (II) false.

(b) (I) is false, (II) true.

(c) Both are true.

(d) Both are false.

37 (I) An increase in default risk on corporate bonds shifts the demand curve for corporate

bonds to the left. (II) An increase in default risk on corporate bonds shifts the demand curve for Treasury bonds to the right. C

(a) (I) is true, (II) false.

(b) (I) is false, (II) true.

(c) Both are true.

(d) Both are false.

38. When budget talks between congressional Republicans and President Clinton occurred

in late 1995, fear of a government default _________, Treasury bond values _________, and interest rates on Treasury bonds _________. A

(a) rose; fell; rose

(b) rose; rose; rose

(c) fell; rose; fell

(d) fell; fell; fell

39. The spread between interest rates on low quality corporate bonds and U.S. government

bonds _________ during the Great Depression. C

(a) was reversed

(b) narrowed significantly

(c) widened significantly

(d) did not change

40. As a result of the Enron collapse and bankruptcy, the demand for low quality corporate

bonds _________, the demand for high quality corporate bonds _________, and the

risk spread _________. B

(a) increased; decreased; was unchanged

(b) decreased; increased; increased

(c) increased; decreased; decreased

(d) decreased; increased; was unchanged

41. Moody’s and Standard and Poor’s are agencies that C

(a) help investors collect when corporations default on their bonds.

(b) advise municipal bond issuers on the tax exempt status of their bonds.

(c) produce information about the probability of default on corporate bonds.

(d) maintain liquid markets for corporate bonds.

42If Moody’s or Standard and Poor’s downgrades its rating on a corporate bond, the demand for the bond _________ and its yield _________. B&D

(a) increases; decreases

(b) decreases; increases

(c) increases; increases

(d) decreases; decreases

43. Corporate bonds are not as liquid as government bonds because A

(a) fewer bonds for any one corporation are traded, making them more costly to sell.

(b) the corporate bond rating must be calculated each time they are traded.

(c) corporate bonds are not callable.

(d) all of the above.

(e) only (a) and (b) of the above.

44 Which of the following statements are true? A

(a) Because coupon payments on municipal bonds are exempt from federal income tax,

the expected after-tax return on them will be higher for individuals in higher

income tax brackets.

(b) An increase in tax rates will increase the demand for Treasury bonds, lowering

their interest rates.

(c) Interest rates on municipal bonds will be higher than on comparable bonds without

the tax exemption.

(d) Only (a) and (b) are true statements.

45. When a municipal bond is given tax-free status, the demand for municipal bonds shifts

_________, causing the interest rate on the bond to _________ D

(a) leftward; rise.

(b) leftward; fall.

(c) rightward; rise.

(d) rightward; fall.

46. If a corporation begins to suffer large losses, then the default risk on its bonds will

_________ and the

equilibrium interest rate on these bonds will ___________.C

A. increase; decrease

B. decrease; increase

C. increase; increase

D. decrease; decrease

47. According to the pure expectations theory of the term structure,

______________________________.D

A. when the yield curve is steeply upward-sloping, short-term interest rates are

expected to rise in the future

B. when the yield curve is downward-sloping, short-term interest rates are expected to

decline in the future

C. buyers of bonds prefer short-term to long-term bonds

D. only A and B of the above

Chapter 9

The Money Markets

48. Brokerage firms that offered money market security accounts in the 1970s had a cost

advantage over banks in attracting funds because the brokerage firms E

(a) were not subject to deposit reserve requirements.

(b) were not subject to the deposit interest rate ceilings.

(c) were not limited in how much they could borrow from depositors.

(d) had the advantage of all the above.

(e) had the advantage of only (a) and (b) of the above.

49 Which of the following statements about the money market are true? E

(a) Not all commercial banks deal for their customers in the secondary market.

(b) Money markets are used extensively by businesses both to warehouse surplus funds

and to raise short-term funds.

(c) The single most influential participant in the U.S. money market is the U.S.

Treasury Department.

(d) All of the above are true.

(e) Only (a) and (b) of the above are true.

50. Which of the following statements about the money markets are true? D

(a) Most money market securities do not pay interest. Instead the investor pays less for

the security than it will be worth when it matures.

(b) Pension funds invest a portion of their assets in the money market to have sufficient

liquidity to meet their obligations.

(c) Unlike most participants in the money market, the U.S. Treasury Department is

always a demander of money market funds and never a supplier.

(d) All of the above are true.

(e) Only (a) and (b) of the above are true.

51. Which of the following are true statements about participants in the money markets? D

(a) Large banks participate in the money markets by selling large negotiable CDs.

(b) The U.S. government and corporations borrow in the money markets because cash

inflows and outflows are rarely synchronized.

(c) The Federal Reserve is the single most influential participant in the U.S. money

market.

(d) All of the above are true.

(e) Only (a) and (b) of the above are true.

52. The most influential participant(s) in the U.S. money market A

(a) is the Federal Reserve.

(b) is the U.S. Treasury Department.

(c) are the large money center banks.

(d) are the investment banks that underwrite securities.

53. The Fed is an active participant in money markets mainly because of its responsibility

to B

(a) lower borrowing costs to encourage capital investment.

(b) control the money supply.

(c) increase the interest income of retirees holding money market instruments.

(d) assist the Securities and Exchange Commission in regulating the behavior other

money market participants.

54. Commercial banks are large holders of _________ and are the major issuer of

_________. B

(a) negotiable certificates of deposit; U.S. government securities

(b) U.S. government securities; negotiable certificates of deposit

(c) commercial paper; Eurodollars

(d) Eurodollars; commercial paper

55. The primary function of large diversified brokerage firms in the money market is to B

(a) sell money market securities to the Federal Reserve for its open market operations.

(b) make a market for money market securities by maintaining an inventory from

which to buy

or sell.

(c) buy money market securities from corporations that need liquidity.

(d) buy T-bills from the U.S. Treasury Department.

56. Finance companies raise funds in the money market by selling A

(a) commercial paper.

(b) federal funds.

(c) negotiable certificates of deposit.

(d) Eurodollars.

57. Finance companies play a unique role in money markets by A

(a) giving consumers indirect access to money markets.

(b) combining consumers’ investments to purchase money market securities on their

behalf.

(c) borrowing in capital markets to finance purchases of money market securities.

(d) assisting the government in its sales of U.S. Treasury securities.

10. Money market securities have all the following characteristics except they are not

______________. B

A. short term

B. money

C. low risk

D. very liquid

11. Which of the following statements about the money markets are true? D

A. Most money market securities do not pay interest. Instead the investor pays less for

the security than it will be worth when it matures.

B. Pension funds invest a portion of their assets in the money market to have sufficient

liquidity to meet their obligations.

C. Unlike most participants in the money market, the U.S. Treasury Department is

always a demander of money market funds and never a supplier.

D. All of the above are true.

Chapter 10

58. A firm that chooses to finance a new plant by issuing money market securities C

(a) must incur the cost of issuing new securities to roll over its debt.

(b) runs the risk of having to pay higher interest rates when it rolls over its debt.

(c) incurs both the cost of reissuing securities and the risk of having to pay higher

interest rates on the new debt.

(d) is more likely to profit if interest rates rise while the plant is being constructed.

59. The primary reason that individuals and firms choose to borrow long-term is to B

(a) reduce the risk that interest rates will fall before they pay off their debt.

(b) reduce the risk that interest rates will rise before they pay off their debt.

(c) reduce monthly interest payments, as interest rates tend to be higher on short-term

than

long-term debt instruments.

(d) reduce total interest payments over the life of the debt.

60. A firm will borrow long-term A

(a) if the extra interest cost of borrowing long-term is less than the expected cost of

rising interest rates before it retires its debt.

(b) if the extra interest cost of borrowing short-term due to rising interest rates does not

exceed the expected premium that is paid for borrowing long term.

(c) if short-term interest rates are expected to decline during the term of the debt.

(d) if long-term interest rates are expected to decline during the term of the debt.

61. The primary issuers of capital market securities include B

(a) the federal and local governments.

(b) the federal and local governments, and corporations.

(c) the federal and local governments, corporations, and financial institutions.

(d) local governments and corporations.

62. Governments never issue stock because A

(a) they cannot sell ownership claims.

(b) the Constitution expressly forbids it.

(c) both (a) and (b) of the above.

(d) neither (a) nor (b) of the above.

63 (I) The primary issuers of capital market securities are federal and local governments, and corporations. (II) Governments never issue stock because they cannot sell ownership claims. C

(a) (I) is true, (II) false.

(b) (I) is false, (II) true.

(c) Both are true.

(d) Both are false.

64 (I) The primary issuers of capital market securities are financial institutions.

(II) The largest purchasers of capital market securities are corporations. D

(a) (I) is true, (II) false.

(b) (I) is false, (II) true.

(c) Both are true.

(d) Both are false.

65 The distribution of a firm’s capital between debt and equity is its D

(a) leverage ratio.

(b) liability structure

(c) acid ratio.

(d) capital structure.

66 The largest purchasers of capital market securities are A

(a) households.

(b) corporations

(c) governments.

(d) central banks.

67. Individuals and households frequently purchase capital market securities through

financial institutions such as E

(a) mutual funds.

(b) pension funds.

(c) money market mutual funds.

(d) all of the above.

(e) only (a) and (b) of the above.

68 (I) Municipal bonds that are issued to pay for essential public projects are exempt from

federal taxation. (II) General obligation bonds do not have specific assets pledged as

security or a specific source of revenue allocated for their repayment. C

(a) (I) is true, (II) false.

(b) (I) is false, (II) true.

(c) Both are true.

(d) Both are false.

69. The primary reason that individuals and firms choose to borrow long-term is to ________________. B

A. reduce the risk that interest rates will fall before they pay off their debt

B. reduce the risk that interest rates will rise before they pay off their debt

C. reduce monthly interest payments, as interest rates tend to be higher on short-term

than long-term debt instruments

D. reduce total interest payments over the life of the debt

70. Restrictive covenants can ____D______________________________________.

A. limit the amount of dividends the firm can pay

B. limit the ability of the firm to issue additional debt

C. restrict the ability of the firm to enter into a merger agreement

D. do all of the above

Chapter 13

The Foreign Exchange Market

71. If the dollar _________ from 1.2 euros per dollar to 0.8 euros per dollar, the euro

_________ from 0.83 dollars to 1.25 dollars per euro. D

(a) appreciates; appreciates

(b) appreciates; depreciates

(c) depreciates; depreciates

(d) depreciates; appreciates

72. If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro

depreciates from _________ dollars to _________ dollars per euro. A

(a) 1.25; 0.83

(b) 0.83; 1.25

(c) 0.67; 1.50

(d) 1.50; 0.67

73 If the dollar depreciates relative to the Swiss franc, D

(a) Swiss chocolate will become more expensive in the United States.

(b) American computers will become less expensive in Switzerland.

(c) Swiss chocolate will become cheaper in the United States.

(d) both (a) and (b) of the above.

74. If the dollar appreciates relative to the Swiss franc, C

(a) Swiss chocolate will become more expensive in the United States.

(b) American computers will become less expensive in Switzerland.

(c) Swiss chocolate will become cheaper in the United States.

(d) both (a) and (b) of the above.

75. When the exchange rate for the euro changes from $1.00 to $1.20 then, holding everything else constant, the euro has A

(a) appreciated and German cars sold in the United States become more expensive.

(b) appreciated and German cars sold in the United States become less expensive.

(c) depreciated and American wheat sold in Germany becomes more expensive.

(d) depreciated and American wheat sold in Germany becomes less expensive.

76 If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4

percent, then the theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will D

(a) rise by 10 percent.

(b) rise by 2 percent.

(c) fall by 10 percent.

(d) fall by 2 percent.

(e) do none of the above.

77. The theory of purchasing power parity cannot fully explain exchange rate movements

because D

(a) not all goods are identical in different countries.

(b) monetary policy differs across countries.

(c) some goods are not traded between countries.

(d) both (a) and (c) of the above.

(e) both (b) and (c) of the above.

78. The theory of purchasing power parity cannot fully explain exchange rate movements

because C

(a) all goods are identical even if produced in different countries.

(b) monetary policy differs across countries.

(c) some goods are not traded between countries.

(d) fiscal policy differs across countries.

79. Increased demand for a country’s _________ causes its currency to appreciate in the

long run, while increased demand for _________ causes its currency to depreciate. C

(a) imports; imports

(b) imports; exports

(c) exports; imports

(d) exports; exports

80 If the demand for _________ goods decreases relative to _________ goods, the domestic currency will depreciate. D

(a) foreign; domestic

(b) foreign; foreign

(c) domestic; domestic

(d) domestic; foreign

81 Consider the following statements. C

(I) A share of common stock in a firm represents an ownership interest in that firm.

(II) A share of preferred stock is as much like a bond as it is like common stock.

A. (I) is true, (II) false.

B. (I) is false, (II) true.

C. Both are true.

D. Both are

false.

82. A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an

investor’s valuation of this stock if she expects it to be selling for $30 in one year and requires

15 percent return on equity investments? B

A. $30.24

B. $26.30

C. $26.09

D. $27.74

83. In the long run, a rise in a country’s price level (relative to the foreign price level) causes its

currency to _________, while a rise in the country’s relative productivity cause s its currency

to __________. C

A. appreciate; appreciate

B. appreciate; depreciate

C. depreciate; appreciate

D. depreciate; depreciate

84. When Fran?ois the Foreigner considers the expected return on dollar deposits in terms of

foreign currency, the expected return must be adjusted for

____________________________. A

A. any expected appreciation or depreciation of the dollar

B. the interest rates on foreign deposits

C. both A and B of the above

D. neither A nor B of the above

Chapter 14

The International Financial System

85 When the central bank allows the purchase or sale of domestic currency to have an

effect on the monetary base, it is called B

(a) a sterilized foreign exchange intervention.

(b) an unsterilized foreign exchange intervention.

(c) an exchange rate feedback rule.

(d) a money neutral foreign exchange intervention.

86 A foreign exchange intervention with an offsetting open market operation that leaves

the monetary base unchanged is called B

(a) an unsterilized foreign exchange intervention.

(b) a sterilized foreign exchange intervention.

(c) an exchange rate feedback rule.

(d) a money neutral foreign exchange intervention.

87. An unsterilized intervention in which domestic currency is sold to purchase foreign

assets leads to E

(a) a gain in international reserves.

(b) an increase in the money supply.

(c) an appreciation in the domestic currency.

(d) all of the above.

(e) only (a) and (b) of the above.

88. An unsterilized intervention in which domestic currency is sold to purchase foreign

assets leads to A

(a) a gain in international reserves.

(b) a decrease in the money supply.

(c) an appreciation in the domestic currency.

(d) all of the above.

(e) only (a) and (b) of the above.

89. A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign

exchange market has the same effect as an open market _________ of bonds to

_________ the monetary base and the money supply. D

(a) sale; decrease

(b) purchase; decrease

(c) sale; increase

(d) purchase; increase

90. An expected appreciation of the domestic currency that shifts the R F schedule to the left

is caused by a(n) _________ intervention in which the domestic currency is _________.

D

(a) sterilized; sold to purchase foreign assets

(b) sterilized; purchased by selling foreign assets

(c) unsterilized; sold to purchase foreign assets

(d) unsterilized; purchased by selling foreign assets

91 Because sterilized interventions mean offsetting open market operations, there is no

impact on the monetary base and the money supply, and therefore a sterilized

intervention D

(a) causes the exchange rate to overshoot in the short run.

(b) causes the exchange rate to undershoot in the short run.