Lecture 3 Money and Banking

Holding everything else constant -if wealth increases, demand for asset A increases and demand for alternative assets decreases. -the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A. -if asset A's risk rises relative to that of alternative assets, the demand will increase for asset A. -the lower the expected return to asset A relative to alternative assets, the greater will be the demand for asset A.

the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A.

Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant. decrease; decrease; increase decrease; increase; increase increase; increase; increase increase; decrease; increase

increase; decrease; increase

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. erases decreases increases has no effect on

increases

A decrease in the brokerage commissions in the housing market from 6% to 5% of the sales price will shift the ________ curve for bonds to the ________, everything else held constant. demand; left supply; left supply; right demand; right

demand; left

A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________. fewer; fall more; rise more; fall fewer; rise

more; fall

Everything else held constant, a decrease in wealth increases the demand for gold. increases the demand for bonds. increases the demand for stocks. reduces the demand for silver.

reduces the demand for silver

________ in the money supply in the market for money creates excess ________ money, causing interest rates to ________, everything else held constant. An increase; supply of; rise An increase; demand for; fall A decrease; supply of; fall A decrease; demand for; rise

A decrease; demand for; rise

When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________. above; demand; fall below; supply; fall above; demand; rise above; supply; rise

above; demand; fall

Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________. decreases; right decreases; left increases; left increases; right

decrease; left

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. decrease; left increase; right decrease; right increase; left

decrease; left

If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________. decreases; decreases increases; increases decreases; increases increases; decreases

decreases; increases

When the price of a bond decreases, all else equal, the bond demand curve inverts. shifts left. does not shift. shifts right.

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; direct upward; direct upward; inverse downward; inverse

downward; inverse

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. increases decreases fluctuates remains the same

increases

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

increases; increases

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

increases; increases

If there is an excess supply of money -individuals sell bonds, causing the interest rate to fall. -individuals buy bonds, causing interest rates to rise. -individuals buy bonds, causing interest rates to fall. -individuals sell bonds, causing the interest rate to ris

individuals buy bonds, causing interest rates to fall.

If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the -interest rate will fall. -interest rate will rise. -interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth. -interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth.

interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth.

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; risk rise; liquidity fall; liquidity fall; risk

rise; liquidity

In the market for money, when real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. falls; left; rises rises; right; rises rises; left; rises falls; right; rises

rises; right; rises

Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________. falls; falls rises; falls falls; rises rises; rises

rises; rises

When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________. supply of; fall supply of; rise demand for; rise demand for; fall

supplky of; fall

When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________. supply of; rise supply of; fall demand for; rise demand for; fall

supply of; fall

You would be more willing to buy AT&T bonds (holding everything else constant) if -the brokerage commissions on bond sales become cheaper. -interest rates are expected to rise. -you expect diamonds to appreciate in value. -your wealth has decreased.

the brokerage commissions on bond sales become cheaper.

Everything else held constant, when prices in the art market become more uncertain -the supply curve for bonds shifts to the right and the interest rate falls. -the demand curve for bonds shifts to the left and the interest rate rises. -the demand curve for bonds shifts to the right and the interest rate falls. -the demand curve for bonds shifts to the left and the interest rate falls.

the demand curve for bonds shifts to the right and the interest rate falls.

Everything else held constant, when the government has higher budget deficits -the demand curve for bonds shifts to the left and the interest rate falls. -the demand curve for bonds shifts to the left and the interest rate rises. -the supply curve for bonds shifts to the right and the interest rate rises. -the supply curve for bonds shifts to the right and the interest rate falls.

the supply curve for bonds shifts to the right and the interest rate rises.