Econ 353 Chapter 5 Exam Second Half

33) An increase in the interest rate A) decreases the quantity of money demanded. B) increases the demand for money. C) decreases the demand for money. D) increases the quantity of money demanded.

A) decreases the quantity of money demanded.

42) In the market for money, when the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A) left; rises B) left; falls C) right; rises D) right; falls

A) left; rises

44) Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect. A) liquidity B) income C) price level D) expected-inflation

A) liquidity

38) In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant. A) stay where it is B) shift left C) shift right D) invert

A) stay where it is

47) If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if A) the liquidity effect is larger than the other effects. B) the liquidity effect is smaller than the expected inflation effect. C) there is fast adjustment of expected inflation. D) there is slow adjustment of expected inflation.

A) the liquidity effect is larger than the other effects.

35) In the market for money, a decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A) decrease; right B) decrease; left C) increase; left D) increase; right

B) decrease; left

30) The bond supply and demand framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________. A) government budget deficits; money B) expected inflation; money C) expected inflation; bonds D) government budget deficits; bonds

B) expected inflation; money

29) Holding everything else constant in the market for money, as the interest rate rises, the opportunity cost of holding money ________ thus making money less desirable. So the quantity of money demanded falls. A) decreases B) increases C) remains the same D) fluctuates

B) increases

45) In the liquidity preference framework, a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs A) at the moment the expected inflation rate hits its peak. B) at the moment the inflation rate hits it peak. C) at the moment the price level hits its peak (stops rising) because both the price level and expected inflation effects are at work. D) immediately after the price level begins to rise, because both the price level and expected inflation effects are at work.

C) at the moment the price level hits its peak (stops rising) because both the price level and expected inflation effects are at work.

25) When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) increases; decreases; falls C) decreases; increases; rises D) decreases; decreases; falls

C) decreases; increases; rises

27) In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________. A) demand for; fall B) supply of; rise C) demand for; rise D) supply of; fall

C) demand for; rise

36) 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. A) increase; left B) decrease; left C) increase; right D) decrease; right

C) increase; right

28) If there is an excess supply of money A) individuals sell bonds, causing the interest rate to rise. B) individuals buy bonds, causing interest rates to rise. C) individuals buy bonds, causing interest rates to fall. D) individuals sell bonds, causing the interest rate to fall.

C) individuals buy bonds, causing interest rates to fall.

46) When the growth rate of the money supply increases, interest rates end up being permanently lower if A) the expected inflation effect is larger than the liquidity effect. B) there is slow adjustment of expected inflation. C) the liquidity effect is larger than the other effects. D) there is fast adjustment of expected inflation.

C) the liquidity effect is larger than the other effects.

31) In Keynes's liquidity preference framework, if there is excess demand for money, there is A) an excess demand for bonds. B) too much money. C) equilibrium in the bond market. D) an excess supply of bonds.

D) an excess supply of bonds.

39) In the market for money, when the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; increases; rise B) supply; increases; rise C) supply; decreases; fall D) demand; decreases; fall

D) demand; decreases; fall

43) In the market for money, when the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; increases; rise B) supply; decreases; fall C) supply; increases; rise D) demand; decreases; fall

D) demand; decreases; fall

34) If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________. A) buy; rise B) buy; fall C) sell; fall D) sell; rise

D) sell; rise

26) When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________. A) supply of; rise B) demand for; fall C) demand for; rise D) supply of; fall

D) supply of; fall

32) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. B) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. D) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.

D) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.