Quiz 5 - Chapter 5

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

According to Milton Friedman, a price level 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

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

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.

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

demand for; rise

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.

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

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.

only (b) and (c) of the above smaller than; higher than larger than; lower than

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

only (b) and (d) of the above bond issuers; bond demanders bond issuers; investors

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

positively

Everything else held constant, a decrease in wealth

reduces the demand for silver.

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.

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 ________ curve of bonds is equivalent to the ________ curve of loanable funds.

demand; supply

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

downward; inverse

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

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

increases; decreases

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

indirect approach; the bond market

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

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

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

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

upward; direct