Chapter 14 Questions: Interest Rates, Bond Prices, and the Money Model

During the Great Recession of 2007-2009, interest rates A)decreased to about zero, and investments increased sharply. B)decreased to about zero, and investments also declined sharply. C)increased sharply, and investments declined significantly. D)increased sharply, and investments also rose significantly.

decreased to about zero, and investments also declined sharply.

We hold more money when the interest rate A)rises because the opportunity cost of holding money is going up. B)falls because it has a low opportunity cost. C)falls because at lower interest rates the opportunity cost of holding money goes up. D)rises because bonds are now too expensive so we sell them to hold more money

falls because it has a low opportunity cost.

The discount rate is A)the interbank overnight lending rate of at least 1 million dollars. B)the rate that a bank pays the Fed when it borrows from the Fed. C)the rate that the Treasury pays when it borrows from the Fed. D)none of the above.

the rate that a bank pays the Fed when it borrows from the Fed.

The prime rate is A)the rate that they Fed pays when it borrows money from the US Treasury. B)the overnight lending rate that they Fed charges a member bank. C)the rate that banks charge their most preferred customers. D)none of the above.

the rate that banks charge their most preferred customers.

From the money model above, what would be the cause and effect of the money supply shifting to the right? A)FFR1, Ms1. B)FFR2, Ms2. C)FFR1, Ms2. D)FFR3, Ms1. E)FFR3, Ms2.

A bond purchase by the Fed and a decrease in interest rates.

An increase in spending in the economy will cause which of the following changes in interest rates? A)An increase in interest rates as the demand for money increases. B)No change in interest rates, because changes in interest rates cause changes in investment spending. C)A decrease in interest rates as the supply of money increases. D) A decrease in interest rates as the supply of money decreases.

An increase in interest rates as the demand for money increases.

A decrease in the interest rate will cause a(n) A) increase in the quantity supplied of money. B)decrease in the transaction demand for money. C)decrease in the amount of money held as an asset. D)increase in the amount of money held as an asset.

Increase in the amount of money held as an asset

An increase in interest rates causes the A)quantity demanded of money to increase. B)quantity demanded of money to decrease. C)demand for money to increase. D) demand for money to decrease.

Quantity demanded of money to decrease.

What is the opportunity cost of holding currency? A) The opportunity cost is zero. B)The current interest rate on bonds. C) The interest that could have been earned if the currency was in the bank. D) Money doesn't have a cost until you spend it.

The interest that could have been earned if the currency was in the bank.

Which of the following varies directly with the interest rate? A)The opportunity cost of holding money. B)The transaction demand for money. C)The price of a bond. D)All of the above.

The opportunity cost of holding money

An increase in the money supply is likely to reduce A)nominal income. B)the demand for money. C)interest rates. D)the general price level.

Interest rates

The equilibrium rate of interest is determined by the intersection of the A)supply of money and the asset demand for money. B)supply of money and the transaction demand for money. C)supply of money and the total demand for money. D)investment demand and the total demand for money.

supply of money and the total demand for money.

The supply of money is vertical because it is assumed that A)the Fed has the ultimate control of the money supply. B)banks create money through the multiplier process. C)bank behavior in creating money is pro-cyclical. D)all of the above.

the Fed has the ultimate control of the money supply.

The Federal Funds Rate is

the bank to bank overnight lending rate of at least 1 million dollars. the rate that a bank pays another bank when it borrows money on the federal funds market.

Which of the following will likely cause an increase in the supply of money? A) An increase in stock prices. B) A decrease in the money multiplier. C) An increase in the currency people hold. D) An increase in bank reserves.

An increase in bank reserves.

Which of the following statements is true? A)A lower interest rate raises the opportunity cost of holding money. B)Bond prices and the interest rate are inversely related. C)The total demand for money is directly related to the interest rate. D)The supply of money is directly related to the interest rate.

Bond prices and the interest rate are inversely related.

From the money model above and starting at point FFR1, Ms1, which point would be the new (interest rate, quantity of money), from an increase in RGDP and purchase of T-bills by the FED. A)FFR1, Ms1. B)FFR2, Ms2. C)FFR1, Ms2. D)FFR3, Ms1. E)FFR3, Ms2.

FFR1, Ms2

Which of the following are false?

The demand for money is upward sloping. The demand for money is vertical. The supply of money is the positive relationship between the quantity supplied of money and the interest rate. Banks can create money by printing Federal Reserve Notes The US money multiplier rises during recessions.

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)a line parallel to the horizontal axis. B)a vertical line. C)a downward sloping line or curve from left to right. D)an upward sloping line or curve from left to right.

a downward sloping line or curve from left to right.

An increase in the demand for money would cause A) a fall in bond prices, an increase in interest rates, and an increase in the suppl of money. B) a rise in bond prices, an increase in interest rates, and no change in the money supply. C) a fall in bond prices, an increase in interest rates, and an increase in the quantity supplied of money. D) a fall in bond prices, an increase in interest rates and no change the supply of money.

a fall in bond prices, an increase in interest rates and no change the supply of money.

The demand for money function will shift to the right for

an increase in consumer confidence. an increase in business confidence. an increase in government borrowing. an increase in the expected returns on investment.

The demand for money will shift to the right as a result of A)an increase in GDP. B)an increase in the interest rate. C)a decline in the interest rate. D)an increase in wealth.

an increase in wealth.

An increase in the money supply would cause A)bond prices to rise, interest rates to fall, and an increase the quantity demanded for money. B)bond prices to fall, interest rate to fall, and an increase in the demand for money. C)bond prices to fall, interest rates to fall, and an increase the quantity demanded of money. D) bond prices to rise, interest rates to fall and an increase in the demand for money.

bond prices to rise, interest rates to fall, and an increase the quantity demanded for money.

A lower real interest rate typically induces consumers to A)save more. B)buy fewer imported goods. C)purchase more goods that are bought using credit. D)purchase fewer goods that are bought without using credit.

purchase more goods that are bought using credit.