ECO 315 Chapter 5

Holding all else constant, if the risk of losing money from bond investment increases, the demand for bonds will ______ and the demand curve for bonds shift to ______.

decrease; the left

A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant.

decrease;decrease

Using the Liquidity Preference Framework, a decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.

decreases; left

In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.

demand for; rise

When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.

demand; fall

Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________.

decrease; left

Holding all else constant, if the expected return from bond investment decreases, the demand for bonds will ______ and the demand curve for bonds shift to ______.

decrease; the left

Holding all else constant, if the supply curve for bonds shift to the right, the new equilibrium bond price will _____ and the corresponding interest rate will ______.

decrease;increase

In the loanable funds framework, the ________ curve of bonds is equivalent to the ________ curve of loanable funds.

demand;supply

When the price of a bond decreases, all else equal, the bond demand curve

does not shift

In the direct approach, demand for money is a function of _______.

income and price level

Using the Liquidity Preference Framework, a rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant.

increase; increase

According to Milton Freidman, an income effect will tend to ______ the interest rate in the ______.

increase; long run

Holding all else constant, if the expected return from bond investment increases, the demand for bonds will ______ and the demand curve for bonds shift to ______.

increase; the right

Holding all else constant, if the risk of losing money from bond investment decreases, the demand for bonds will ______ and the demand curve for bonds shift to ______.

increase; the right

Factors that can cause the supply curve for bonds to shift to the right include

an expansion in the overall economic activity

In the figure above, one factor NOT responsible for the decline in the demand for money is

an increase in income.

In the figure above, the factor responsible for the decline in the interest rate is

an increase in the money supply

If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________.

below;demand

When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________.

below;rise

Assume that bonds and real estate are substitutes in investment. If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________.

increase;decrease

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant.

increase;right

An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.

increases

Assume that bonds and gold are substitutes in investment. If prices in the diamond market become less volatile, all else equal, then the demand for diamonds ________ and the demand for gold ________.

increases; decreases

When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant.

increases;increases

The loanable fund framework is called the ________ and uses ______ to understand the behavior of interest rates.

indirect approach; the bond market

In the loanable funds framework, the ________ is measured on the vertical axis.

interest rate

A change in wealth or income is _______ related to the asset demand.

positively

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________.

rises; rises

Holding all else constant, if government deficit increases, the ______ curve of bonds will shift to _______.

supply; the right

In the loanable funds framework, borrowers are known as _______ and lenders are known as ______.

bond issuers; bond demanders bond issuers; investors

The loanable fund framework allows you to know how the _______ has changed to know how the ______ has changed.

bond price; interest rate

Assume that stocks and Treasury bills are substitutes in investment. If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.

decrease; increase

When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.

larger;slow

Everything else held constant, 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 ________.

left; rises

If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________.

left;rises

Using the Liquidity Preference Framework, when the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.

left;rises

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.

liquidity

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

liquidity effect

Milton Friedman's analysis of the impact of money supply change on the interest rate is a _______ analysis and that of John Maynard Keynes is a _______ analysis.

long-term; short-term

The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.

lower; quantity demanded

According to John Maynard Keynes, when government increases _______, the interest rate will tend to ______ in the short run.

money supply; decrease due to the liquidity effect

Liquidity effect means that as ______ increases, the speed and easiness of obtaining cash becomes ______.

money supply; faster and easier

A change in the level of risk is _______ related to the change in the asset demand.

negatively

A change in expected return is _______ related to the change in the asset demand.

positively

A decrease in wealth or income is _______ related to the change in the asset demand.

positively

In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ______

price; interest rate

Everything else held constant, a decrease in wealth

reduces the demand for silver

Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________.

rise; Fisher Effect

It is 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.

rise; liquidity

The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant.

rise;increases

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.

rises;right

When the liquidity effect is _______ the combined force of the income, price level, and expected infaltino effects, the interest rate will end up being ______ where it was at.

smaller than; higher than larger than; lower than

When the liquidity effect is _______ the combined force of the income, price level, and expected inflation effects, the interest rate will end up being ______ where it was at.

smaller than; higher than larger than; lower than

The loanable funds framework uses _____ to analyze interest rate movements

the bond market

The liquidity preference framework is known as ________ and uses _______ to understand the behavior of the interest rates.

the direct approach; the market for money

The opportunity cost of holding money is

the interest rate

If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if

the liquidity effect is larger than the other effects

When the growth rate of the money supply increases, interest rates end up being permanently lower if

the liquidity effect is larger than the other effects

The bond supply curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity supplied of bonds, everything else equal.

upward; direct