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