Interest Rates
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the demand for money can be represented by
a downward sloping line or curve from left to right
An increase in the demand for money would cause
a fall in bond prices, an increase in interest rates and no change in the supply of money
An increase in the money supply would cause
bond prices to rise, interest rates to fall, and an increase in the quantity demanded
During the Great Recession, interest rates
decreased to about zero, and investments also declined sharply
We hold more money when the interest rate
falls because it has a low opportunity cost
A decrease in the interest rate will cause an
increase in the amount of money held as an asset
An increase in the money supply is likely to reduce
interest rates
A lower real interest rate typically induces consumers to
purchase more goods that are bought using credit
An increase in interest rates causes the
quantity demanded of money to decrease
The supply of money is vertical because it is assumed that
the Fed has the ultimate control of the money supply
What varies directly with the interest rate?
the opportunity cost of holding money
The discount rate is
the rate that a bank pays the Fed when it borrows from the Fed
The Prime Rate is
the rate that banks charge their most creditworthy or preferred customers
The demand for money will shift to the right as a result of
(1) an increase in wealth (2) an increase in GDP
The following statements is true:
(1) bond prices and the interest rate are inversely related
The Federal Fund Rate is
(1) the bank to bank overnight lending rate of at least 1 million dollars (2) the rate a bank pays another bank when it borrows money on the federal funds market
What is the opportunity cost of holding currency?
(1) the interest that could have been earned if the currency in the bank (2) the current interest rate on bonds
What is the cause and effect of the money supply shifting to the right?
A bond purchased by the Fed and a decrease in interest rates