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

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

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.

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

downward; inverse

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

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 uses _____ to analyze interest rate movements

The bond market

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 decrease in the interest rate from i1 to i2 can be explained by

an increase in money growth.

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

an increase in the money supply.

Pieces of property that serve as a store of value are called

assets.

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

bond demanders; bond suppliers

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

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

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

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

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

interest rate

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.

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

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 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

The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases.

rises; quantity supplied

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

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

supply; the right

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.

According to Milton Freidman, a price level effect will tend to ______ the interest rate in the ______.

increase; long run

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

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

increases; increases

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

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

increase; long run

The interest rate falls when either the demand for bonds ________ or the supply of bonds ________.

increases; decreases

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

increases; increases

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

increases; right; falls

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

lenders; borrowers

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

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

Holding all other factors constant, the quantity demanded of an asset is

positively related to wealth.

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

rise; Fisher effect

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

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 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.

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

upward; direct

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

an expansion in overall economic activity.

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

money supply; decrease

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