ECO 414 CH 5

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. A) increases B) decreases C) has no effect on D) erases

increases

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. A) rise; increases B) rise; stabilizes C) fall; stabilizes D) fall; increases

rise; increases

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

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

When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant. A) demand; demand B) demand; supply C) supply; demand D) supply; supply

B) demand; supply

In the figure above, the price of bonds would fall from P2 to P1 if A) there is a business cycle recession. B) there is a business cycle expansion. C) inflation is expected to increase in the future. D) inflation is expected to decrease in the future.

B) there is a business cycle expansion.

When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

C) decreases; increases

In the figure above, a factor that could cause the demand for bonds to shift to the right is A) an increase in the riskiness of bonds relative to other assets. B) an increase in the expected rate of inflation. C) expectations of lower interest rates in the future. D) a decrease in wealth.

C) expectations of lower interest rates in the future.

In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) expectations of more profitable investment opportunities. D) a business cycle recession.

C) expectations of more profitable investment opportunities.

The opportunity cost of holding money is A) the level of income. B) the price level. C) the interest rate. D) the discount rate.

C) interest rate.

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. A) fall; liquidity B) fall; risk C) rise; liquidity D) rise; risk

C) rise; liquidity

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

D) decreases the quantity of money demanded.

the price of bonds would fall from P1 to P2 when A) inflation is expected to increase in the future. B) interest rates are expected to fall in the future. C) the expected return on bonds relative to other assets is expected to increase in the future. D) the riskiness of bonds falls relative to other assets.

A) inflation is expected to increase in the future.

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

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

In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall. A) falls; bonds B) falls; money C) rises; bonds D) rises; money

B) falls; money

Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right

B) increase; right

Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the A) income effect. B) liquidity effect. C) price level effect. D) expected inflation effect.

B) liquidity effect.

When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant. A) supply; right B) supply; left C) demand; right D) demand; left

B) supply; left

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

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

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

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

Factors that can cause the supply curve for bonds to shift to the right include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) a decrease in government deficits. D) a business cycle recession.

an expansion in overall economic activity