ECO 315 Chapter 5

Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________.

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

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 diamonds and platinum are substitutes in investment. If the price of diamonds is expected to decrease, all else equal, then the demand for diamonds ________ and the demand for platinum ________.

increases; decreases

If wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant.

increases; increases

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

The demand for silver decreases, other things equal, when

the gold market is expected to boom.

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

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

decrease; increase

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

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

decrease; left

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

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

bond demanders; bond suppliers

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

bond price; interest rate

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 expected inflation effect will tend to ______ the interest rate in the ______.

increase; long run

In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant

increase; right

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 increases, the demand for bonds will ______ and the demand curve for bonds shift to ______

decrease; the left

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

demand; supply

Which of the following effects are discussed in the liquidity preference framework?

Income effect and liquidity effect; Price level effect and expected inflation effect

The Loanable Funds Framework via the Bond Market

Indirect Approach

The loanable funds framework uses _____ to analyze interest rate movements

The bond market

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

an increase in the money supply

Everything else held constant, 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 ________.

fall; left

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

income and price level

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

increase; decrease

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

increase; decrease

A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant.

increase; increase

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

left; rise

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

In the bond market, the bond demanders are the ________ and the bond suppliers are the ________.

lenders; borrowers

Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the

liquidity effect

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

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

A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________.

more; fall

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

positively

A change in liquidity is _______ related to the change in the asset demand.

positively

A change in wealth or income is _______ related to 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

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

Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________.

rise; right

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

Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________.

rises; right

Using the Liquidity Preference Framework, when the price level ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.

rises; right; rises

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

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 or larger than; lower than

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

supply of; fall

The Liquidity Preference Framework via the Market for Money

Direct Approach

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

decrease; decrease

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

does not shift

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