M & B Ch. 5

9) When the price of a bond decreases, all else equal, the bond demand curve A) does not shift. B) shifts right. C) shifts left. D) inverts.

A) does not shift.

21) In the market for money, a lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) increase; decrease C) increase; increase D) decrease; increase

A) decrease; decrease

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

A) decreases; increases

7) The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity demanded of bonds, everything else equal. A) downward; inverse B) upward; direct C) upward; inverse D) downward; direct

A) downward; inverse

22) In the market for money, a rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A) increase; increase

1) 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) erases C) decreases D) has no effect on

A) increases

15) In recent years in Europe, Japan, and the United States, interest rates have remained low because of a combination of A) low inflation and a lack of profitable investment opportunities. B) high inflation and high government deficits. C) high inflation and a lack of profitable investment opportunities. D) low inflation and high government deficits.

A) low inflation and a lack of profitable investment opportunities.

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

A) supply of; fall

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

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

23) In the figure above, the factor responsible for the decline in the interest rate is A) a decline in income. B) an increase in the money supply. C) a decline the price level. D) a decline in the expected inflation rate.

B) an increase in the money supply.

10) Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A) decrease; right B) decrease; left C) increase; left D) increase; right

B) decrease; left

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

B) expectations of more profitable investment opportunities.

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

B) increase; right

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

B) liquidity

14) 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) fall; stabilizes B) rise; increases C) rise; stabilizes D) fall; increases

B) rise; increases

5) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

C) decrease; increase

11) 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 ________. A) left; falls B) right; falls C) left; rises D) right; rises

C) left; rises

6) In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; advancers B) borrowers; advancers C) lenders; borrowers D) borrowers; lenders

C) lenders; borrowers

18) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms A) money and gold. B) real assets and financial assets. C) money and bonds. D) stocks and bonds.

C) money and bonds.

2) Everything else held constant, a decrease in wealth A) increases the demand for gold. B) increases the demand for stocks. C) reduces the demand for silver. D) increases the demand for bonds.

C) reduces the demand for silver.

25) 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; risk B) rise; risk C) rise; liquidity D) fall; liquidity

C) rise; liquidity

16) Everything else held constant, when real estate prices are expected to decrease A) the demand curve for bonds shifts to the left and the interest rate rises. B) the supply curve for bonds shifts to the right and the interest rate falls. C) the demand curve for bonds shifts to the right and the interest rate falls. D) the demand curve for bonds shifts to the left and the interest rate falls.

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

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

D) above; demand; fall

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

D) decreases the quantity of money demanded.

3) If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________. A) decrease; decrease B) increase; increase C) decrease; increase D) increase; decrease

D) increase; decrease