Section 1: Multiple Choice
1) When stock prices become less volatile, the ______ curve for bonds shifts to the _____.
A) demand; right B) demand; left C) supply; left D) supply; right
2) When the federal government's budget deficit decreases, the _____ curve for bonds shifts to the _____.
A) demand; right B) demand; left C) supply; left D) supply; right
3) When bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
4) When prices in the art market become less uncertain,
A) the demand curve for bonds shifts to the left and the interest rate falls.
B) the demand curve for bonds shifts to the right and the interest rate rises.
C) the supply curve for bonds shifts to the right and the interest rate falls.
D) none of the above occurs.
5) When prices in the stock market become more uncertain, the demand curve for bonds shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
6) When the interest rate is above the equilibrium interest rate, there is an excess _____ for (of) money and the interest rate will _____.
A) demand; rise B) demand; fall C) supply; fall D) supply; rise
7) When the price level rises, the demand curve for money shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
8) When the price level falls, the demand curve for money shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
9) When real income _____, the demand curve for money shifts to the _____ and the interest rate _____.
A) falls; left; falls
B) falls; right; falls
C) falls; left; rises
D) rises; left; rises
E) rises; right; falls
10) When the price level _____, the demand curve for money shifts to the _____ and the interest rate _____.
A) falls; left; rises
B) falls; right; falls
C) rises; right; rises
D) rises; right; falls
11) When the Fed _____ the money stock, the money supply curve shifts to the _____ and the interest rate _____.
A) decreases; right; rises
B) increases; right; falls
C) decreases; left; falls
D) increases; left; rises
E) decreases; right; falls
12) When stock prices become _____ volatile, the demand curve for bonds shifts to the _____ and the interest rate _____.
A) more; right; rises
B) more; left; falls
C) less; left; falls
D) less; left; rises
E) less; right; falls
13) When the growth rate of the money supply increases, interest rates end up being permanently higher if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.
14) When the growth rate of the money supply decreases, interest rates end up being permanently higher if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.
15) When the growth rate of the money supply is decreased, interest rates will rise immediately if the
liquidity effect is _____ than the other money supply effects and there is _____ adjustment of
expected inflation.
A) larger; fast B) larger; slow C) smaller; slow D) smaller; fast
16) Holding the expected return on bonds constant, a decrease in the expected return on stocks would _____ the demand for bonds, shifting the demand curve to the _____.
A) decrease; left B) decrease; right C) increase; left D) increase; right
17) Factors that cause the demand curve for bonds to shift to the right include
A) a decrease in the inflation rate.
B) an increase in the volatility of stock prices.
C) an increase in the liquidity of stocks.
D) all of the above.
E) only (a) and (b) of the above.
18) Factors that can cause the supply curve for bonds to shift to the right include
A) an expansion in overall economic activity.
B) an increase in expected inflation.
C) an increase in government deficits.
D) all of the above.
E) only (a) and (b) of the above.
19) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms:
A) real assets and financial assets. B) stocks and bonds.
C) money and bonds. D) money and gold.
20) A higher level of income causes the demand for money to _____ and the demand curve for money to shift to the _____.
A) decrease; right B) decrease; left C) increase; right D) increase; left
21) A decline in the price level causes the demand for money to _____ and the demand curve to shift to the _____.
A) decrease; right B) decrease; left C) increase; right D) increase; left
22) A decline in the expected inflation rate causes the demand for money to _____ and the demand curve to shift to the _____.
A) decrease; right B) decrease; left C) increase; right D) increase; left
23) Holding everything else equal, an increase in the money supply causes
A) interest rates to decline initially.
B) interest rates to increase initially.
C) bond prices to decline initially.
D) both (a) and (c) of the above.
E) both (b) and (c) of the above.
24) It is entirely possible that when the money supply rises, interest rates may _____ if the _____ effect is more than offset by changes in income, the price level, and expected inflation.
A) fall; liquidity B) fall; risk C) rise; liquidity D) rise; risk
25) Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the
A) liquidity effect. B) income effect.
C) price level effect. D) expected inflation effect.
26) An increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to _____ and the demand curve to shift to the _____.
A) rise, right B) rise, left C) fall, right D) fall, left
27) Higher government deficits _____ the supply of bonds and shift the supply curve to the _____.
A) increase, left B) increase, right C) decrease, left D) decrease, right
28) When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; the _____ of bonds increases and the _____ curve shifts to the right.
A) demand, demand B) demand, supply
C) supply, demand D) supply, supply
29) When the inflation rate is expected to rise, interest rates will _____; this result has been termed the _____.
A) fall, Keynes effect
B) fall, Fisher effect
C) rise, Pigou effect
D) rise, Fisher effect
E) rise, Keynes effect
30) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus,
A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
31) Shifting the demand for money curve, a decline in the interest rate can be explained by
A) a decrease in income.
B) a decrease in the expected price level.
C) an increase in money growth.
D) both (a) and (b) of the above.
E) both (a) and (c) of the above.
Figure 5-4
32) In Figure 5-4, the increase in the interest rate from i2 to i1 can be explained by
A) a decrease in money growth.
B) an increase in the expected price level.
C) an increase in income.
D) both (a) and (c) of the above.
E) both (b) and (c) of the above.
Figure 5-5
33) Figure 5-5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the
A) the liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B) the liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C) the liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D) the liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
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1) When stock prices become less volatile, the ______ curve for bonds shifts to the _____.
A) demand; right B) demand; left C) supply; left D) supply; right
2) When the federal government's budget deficit decreases, the _____ curve for bonds shifts to the _____.
A) demand; right B) demand; left C) supply; left D) supply; right
3) When bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
4) When prices in the art market become less uncertain,
A) the demand curve for bonds shifts to the left and the interest rate falls.
B) the demand curve for bonds shifts to the right and the interest rate rises.
C) the supply curve for bonds shifts to the right and the interest rate falls.
D) none of the above occurs.
5) When prices in the stock market become more uncertain, the demand curve for bonds shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
6) When the interest rate is above the equilibrium interest rate, there is an excess _____ for (of) money and the interest rate will _____.
A) demand; rise B) demand; fall C) supply; fall D) supply; rise
7) When the price level rises, the demand curve for money shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
8) When the price level falls, the demand curve for money shifts to the _____ and the interest rate _____.
A) right; rises B) right; falls C) left; falls D) left; rises
9) When real income _____, the demand curve for money shifts to the _____ and the interest rate _____.
A) falls; left; falls
B) falls; right; falls
C) falls; left; rises
D) rises; left; rises
E) rises; right; falls
10) When the price level _____, the demand curve for money shifts to the _____ and the interest rate _____.
A) falls; left; rises
B) falls; right; falls
C) rises; right; rises
D) rises; right; falls
11) When the Fed _____ the money stock, the money supply curve shifts to the _____ and the interest rate _____.
A) decreases; right; rises
B) increases; right; falls
C) decreases; left; falls
D) increases; left; rises
E) decreases; right; falls
12) When stock prices become _____ volatile, the demand curve for bonds shifts to the _____ and the interest rate _____.
A) more; right; rises
B) more; left; falls
C) less; left; falls
D) less; left; rises
E) less; right; falls
13) When the growth rate of the money supply increases, interest rates end up being permanently higher if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.
14) When the growth rate of the money supply decreases, interest rates end up being permanently higher if
A) the liquidity effect is larger than the other effects.
B) there is fast adjustment of expected inflation.
C) there is slow adjustment of expected inflation.
D) the expected inflation effect is larger than the liquidity effect.
15) When the growth rate of the money supply is decreased, interest rates will rise immediately if the
liquidity effect is _____ than the other money supply effects and there is _____ adjustment of
expected inflation.
A) larger; fast B) larger; slow C) smaller; slow D) smaller; fast
16) Holding the expected return on bonds constant, a decrease in the expected return on stocks would _____ the demand for bonds, shifting the demand curve to the _____.
A) decrease; left B) decrease; right C) increase; left D) increase; right
17) Factors that cause the demand curve for bonds to shift to the right include
A) a decrease in the inflation rate.
B) an increase in the volatility of stock prices.
C) an increase in the liquidity of stocks.
D) all of the above.
E) only (a) and (b) of the above.
18) Factors that can cause the supply curve for bonds to shift to the right include
A) an expansion in overall economic activity.
B) an increase in expected inflation.
C) an increase in government deficits.
D) all of the above.
E) only (a) and (b) of the above.
19) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms:
A) real assets and financial assets. B) stocks and bonds.
C) money and bonds. D) money and gold.
20) A higher level of income causes the demand for money to _____ and the demand curve for money to shift to the _____.
A) decrease; right B) decrease; left C) increase; right D) increase; left
21) A decline in the price level causes the demand for money to _____ and the demand curve to shift to the _____.
A) decrease; right B) decrease; left C) increase; right D) increase; left
22) A decline in the expected inflation rate causes the demand for money to _____ and the demand curve to shift to the _____.
A) decrease; right B) decrease; left C) increase; right D) increase; left
23) Holding everything else equal, an increase in the money supply causes
A) interest rates to decline initially.
B) interest rates to increase initially.
C) bond prices to decline initially.
D) both (a) and (c) of the above.
E) both (b) and (c) of the above.
24) It is entirely possible that when the money supply rises, interest rates may _____ if the _____ effect is more than offset by changes in income, the price level, and expected inflation.
A) fall; liquidity B) fall; risk C) rise; liquidity D) rise; risk
25) Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the
A) liquidity effect. B) income effect.
C) price level effect. D) expected inflation effect.
26) An increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to _____ and the demand curve to shift to the _____.
A) rise, right B) rise, left C) fall, right D) fall, left
27) Higher government deficits _____ the supply of bonds and shift the supply curve to the _____.
A) increase, left B) increase, right C) decrease, left D) decrease, right
28) When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; the _____ of bonds increases and the _____ curve shifts to the right.
A) demand, demand B) demand, supply
C) supply, demand D) supply, supply
29) When the inflation rate is expected to rise, interest rates will _____; this result has been termed the _____.
A) fall, Keynes effect
B) fall, Fisher effect
C) rise, Pigou effect
D) rise, Fisher effect
E) rise, Keynes effect
30) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus,
A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
31) Shifting the demand for money curve, a decline in the interest rate can be explained by
A) a decrease in income.
B) a decrease in the expected price level.
C) an increase in money growth.
D) both (a) and (b) of the above.
E) both (a) and (c) of the above.
Figure 5-4
32) In Figure 5-4, the increase in the interest rate from i2 to i1 can be explained by
A) a decrease in money growth.
B) an increase in the expected price level.
C) an increase in income.
D) both (a) and (c) of the above.
E) both (b) and (c) of the above.
Figure 5-5
33) Figure 5-5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the
A) the liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B) the liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C) the liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D) the liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
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