Deck 28: Money, Interest Rates, and Economic Activity

Question 1

Suppose the market interest rate rises from 3 percent to 4 percent. This will lead to in bond prices and in bond yields.

A)a rise; a rise
B)no change; no change
C)a rise; a fall
D)a fall; a fall
E)a fall; a rise

Answer 1

E

Question 2

The hypothesis in economics known as hysteresis is that

A)the monetary transmission mechanism does not apply in an open- economy setting.
B)the path of real GDP in an economy can influence that economy's level of potential output.
C)changes in the money supply have a stronger influence on investment demand than do changes in fiscal policy.
D)the economy's adjustment process operates in response to an expansion of the money supply, but not a contraction.
E)the role of money in the long run is neutral.

Answer 2

B

Question 3

Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to

A)an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
B)an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
C)a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.
D)a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
E)an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.

Answer 3

D

Question 4

Consider the monetary transmission mechanism. If the Bank of Canada were to increase the money supply, we would expect a large increase in aggregate demand if the money demand function

A)and the investment demand function are relatively flat.
B)is relatively steep and the investment demand function is relatively flat.
C)and the investment demand function are relatively steep.
D)is relatively flat and the investment demand function is relatively steep.
E)remains the same and the investment demand function is steep.

Question 5

Consider a Hydro Quebec bond with a face value of $1000, and a present value of $1175. If this bond is offered for sale at $1025, then

A)excess demand for this bond will drive the price up until it reaches its equilibrium market price of $1175.
B)excess supply of this bond will drive the price down until it reaches its face value.
C)the equilibrium market price of this bond has been achieved.
D)individuals will purchase the bond at the offer price which will drive down the price further.
E)Hydro Quebec will be forced to change the face value of the bond.

Question 6

Consider the monetary transmission mechanism. A relatively steep investment demand curve and a relatively flat money demand curve

A)are believed by many monetarists to be realistic descriptions of the economy.
B)make the money supply a particularly powerful policy instrument.
C)imply that large increases in the money supply have little effect on aggregate expenditure.
D)increase the effectiveness of expansionary monetary policy.
E)make it impossible for the Bank of Canada to change the money supply.

Question 7

The monetary transmission mechanism describes the process by which changes in

A)monetary equilibrium influence the interest rate.
B)monetary equilibrium influence real GDP through changes in desired investment.
C)personal consumption affect real GDP.
D)interest rate affect the demand for money.
E)business investment influence real GDP.

Question 8

A decrease in the money supply sets the monetary transmission mechanism in motion which results in

A)a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
B)a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
C)a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
D)a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
E)a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.

Question 9

In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for money depends on the

A)aggregate demand for goods and services.
B)rate of growth of real GDP.
C)level of real GDP and the price level.
D)level of taxes.
E)level of government spending.

Question 10

When Janet expects interest rates to rise in the near future, she will probably be willing to

A)sell bonds now, and hold more money.
B)put her money in a savings account rather than buy bonds.
C)maintain only the current holding of bonds.
D)buy bonds now, but only if their price falls.
E)buy bonds now, and hold less money.

Question 11

The present value of an asset is

A)equivalent to the face value of the asset.
B)the amount someone would pay in the future to have the asset today.
C)the most someone would be willing to pay upon maturity of the asset.
D)the amount someone would pay in the future for the current stream of payments from the asset.
E)the most someone would be willing to pay today for the asset.

Question 12

the price of bonds falling.

A)2 only
B)2 and 3
C)3 only
D)1 and 2
E)1 only

Question 13

Other things being equal, bond prices

A)vary directly with interest rates.
B)vary proportionally with interest rates.
C)are unaffected by interest- rate changes.
D)vary inversely with interest rates.
E)are unaffected by changes in the demand for money.

Question 14

Suppose changes in the money supply only affected the price level and never affected real GDP. If this were the case, it could be viewed as evidence

A)that has no bearing on the theories of either Classical or modern economists.
B)that the modern view of the neutrality of money is correct.
C)supporting both the Classical and modern views of the neutrality of money.
D)that the Classical view of the neutrality of money is correct.
E)that both the Classical and modern views of the neutrality of money are incorrect.

Question 15

Other things being equal, the steeper the AS curve for the economy , the

A)more sensitive the aggregate expenditure function to changes in the interest rate.
B)smaller the impact on the price level from any given increase in the money supply.
C)larger the impact on real output from any given increase in the money supply.
D)less sensitive the aggregate expenditure function to changes in the interest rate.
E)larger the impact on the price level from any given increase in the money supply.

Question 16

How does monetary equilibrium re- establish itself when there is an excess supply of money balances?

A)the price level falls
B)the price of bonds increases
C)the interest rate rises
D)individuals attempt to sell bonds
E)the price of bonds falls

Question 17

When the market price of a bond falls, ceteris paribus, then

A)the market interest rate rises.
B)the term to maturity of the bond decreases.
C)the yield on that bond also falls.
D)the term to maturity of the bond increases.
E)the yield on that bond rises.

Question 18

If the economy is currently in monetary equilibrium, an increase in the money supply will

A)cause an excess demand for money and a decrease in the rate of interest.
B)cause a reduction in the demand for money, leading to a higher rate of interest.
C)not change the equilibrium conditions.
D)lead to a movement down the money demand curve to a lower rate of interest.
E)cause an increase in the demand for money, leading to a lower rate of interest.

Question 19

The monetary transmission mechanism in an OPEN economy is more complicated than it is in a closed economy because the effects of domestic monetary contraction or expansion are

A)weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
B)strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world.
C)strengthened because domestic interest rates must be equal to those in the rest of the world.
D)strengthened because changes in the domestic money supply cause changes in the exchange rate, which then reinforce the changes in desired investment.
E)weakened because changes in the domestic money supply cause changes in the exchange rate which then offset the changes in desired investment.

Question 20

If Robert expects interest rates to fall in the near future, he will probably be willing to

A)sell bonds now, and hold less money.
B)maintain only the current holding of bonds.
C)buy bonds now, but only if their price falls.
D)buy bonds now, and hold less money.
E)put his money in a savings account rather than buy bonds.

Question 21

Consider monetary equilibrium and the monetary transmission mechanism. A rise in the price level, with no change in the supply of money, will

A)decrease aggregate demand but not affect the demand for money.
B)increase the demand for money and decrease aggregate expenditure.
C)decrease the demand for money and increase aggregate demand.
D)increase the demand for money and increase aggregate expenditure.
E)decrease the demand for money and decrease aggregate demand.

Question 22

If there are just two assets, bonds and money, then an equilibrium between the supply and demand for money implies

A)an excess supply of bonds.
B)an indeterminant equilibrium in the bond market.
C)an excess demand for bonds.
D)equilibrium in the bond market.
E)nothing about conditions of demand for the other financial asset.

Question 23

When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls,

A)the present value of the asset is unaffected.
B)the current value of the asset will fall.
C)the present value of the asset will rise.
D)the present value of the asset will fall.
E)the future value of the asset will rise.

Question 24

An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4 percent and the bond is being offered for sale at a price of $9400. The analyst should recommend

A)not purchasing the bond because the buyer could earn an additional $224 by investing the $9400 elsewhere.
B)purchasing the bond because the purchase price is more than its present value and is therefore profitable.
C)not purchasing the bond because the purchase price is less than its present value.
D)purchasing the bond because the purchase price is less than its present value and is therefore profitable.
E)not purchasing the bond because the buyer could earn an additional $376 by investing the $9400 elsewhere.

Question 25

The view of the Classical economists regarding the "neutrality of money" was that

A)the allocation of resources is independent of the distribution of income.
B)the quantity of money has no effect on any real variables in the economy.
C)the real part of the economy cannot affect the level of money prices.
D)the distribution of income is independent of the allocation of resources.
E)money is neutral in its effect on absolute prices in the economy.

Question 26

Monetary policy is ineffective in bringing about changes in aggregate demand when the

A)investment demand curve and money demand function are both relatively steep.
B)investment demand curve is relatively steep and the money demand function is relatively flat.
C)investment demand curve and money demand function are both relatively flat.
D)investment demand curve is relatively flat and the money demand function is relatively steep.
E)none of the above -- monetary policy is always equally effective.

Question 27

When i is the annual interest rate, the formula for calculating the present value of a bond with a face value of R dollars, receivable in one year is

A)PV = i(R+i)
B)PV = (1+i)/R
C)PV = R/(1+i)
D)PV = R/i
E)PV = R (1+i)

Question 28

If the annual market rate of interest is 5 percent, an asset that promises to pay $100 after each of the next two years has a present value of

A)$ 90.70.
B)$ 95.24.
C)$ 181.40.
D)$ 185.94.
E)$ 200.00.

Question 29

Speculative demand for money arises from the desire by individuals and firms to hold cash balances

A)to meet unforeseen business expenses.
B)in anticipation of investing in capital purchases for the firm.
C)to maintain adequate cash flow in case of inflation.
D)for speculative equity purchases.
E)in anticipation of changes in interest rates and bond prices.

Question 30

Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to

A)decrease, shifting the M_D curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward.
B)increase, shifting the M_D curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward.
C)decrease, shifting the M_D curve downward, lowering the interest rate and increasing desired investment, causing the AE curve to shift upward.
D)increase, shifting the M_D curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward.
E)increase, shifting the M_D curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward.

Question 31

Suppose the market interest rate is stable at 4 percent and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that

A)bond issuers are facing an excess demand for their bonds.
B)bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds.
C)bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds.
D)there is a positive relationship between interest rates and bond prices.
E)there is no causal relationship between market interest rates and bond prices.

Question 32

Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds. The analyst is probably encouraging an increase in money balances for which reason?

A)transaction demand
B)portfolio demand
C)precautionary demand
D)present value demand
E)speculative demand

Question 33

Suppose that at a given interest rate and money supply, all firms and households simultaneously try to add to their money balances. They do this by trying to , which causes an excess , which causes a(n)_ , and finally a(n) in the interest rate.

A)sell bonds; demand for bonds; increase in the price of bonds; decrease
B)sell bonds; supply of bonds; increase in the price of bonds; decrease
C)buy bonds; demand for bonds; increase in the price of bonds; decrease
D)sell bonds; supply of bonds; decrease in the price of bonds; increase
E)buy bonds; supply of bonds; decrease in the price of bonds; increase

Question 34

Consider monetary equilibrium and the monetary transmission mechanism. A decrease in the price level, with no change in the supply of money, will

A)increase the demand for money and decrease aggregate expenditure.
B)decrease the demand for money and decrease aggregate demand.
C)increase the demand for money and increase aggregate expenditure.
D)decrease the demand for money and leave aggregate demand unchanged.
E)decrease the demand for money and increase aggregate demand.

Question 35

Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will

A)not hold money as long as bonds pay a positive rate of interest.
B)hold more money when the current interest rate is very low.
C)hold lots of money even at very high interest rates.
D)hold less money when the current interest rate is very low.
E)hold less money when bond prices rise.

Question 36

In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to _ those future payments.

A)adjust
B)discount
C)correct
D)maximize
E)inflate

Question 37

The monetary transmission mechanism provides a partial explanation for the downward slope of the AD curve. For a given vertical M^S curve, the explanation for the negative relationship between the price level and aggregate demand is as follows: A rise in the price level shifts the M_D curve

A)to the left, the interest rate falls, and desired investment expenditure rises.
B)to the left, the interest rate rises and desired investment expenditure falls.
C)to the right, the interest rate rises and desired investment expenditure falls.
D)to the right, the interest rate falls and desired investment expenditure falls.
E)to the right, the interest rate rises and desired investment expenditure rises.

Question 38

to guard against the uncertainty of the timing of receipts and payments

A)3 only
B)1 only
C)2 only
D)1 and 2
E)1 and 3

Question 39

If the annual market interest rate is 20 percent, the annual opportunity cost of having $50 cash in your pocket is

A)$1000.
B)$50.
C)$10.
D)$2.
E)$0.

Question 40

When there is an excess supply of money, monetary equilibrium is restored through

A)individuals attempting to sell bonds.
B)the price of bonds increasing.
C)the price of bonds falling.
D)the price level falling.
E)interest rates rising.

Question 41

What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10 percent per year?

A)$100.00
B)$110.00
C)$121.00
D)$133.10
E)$221.00

Question 42

The "transactions demand" for money arises from the fact that

A)there is uncertainty about the movement of interest rates.
B)households decide to hold money in order to make purchases of goods and services..
C)households wish to have all their wealth in the form of money.
D)households want to keep cash on had to buy bonds if bond prices drop.
E)there is uncertainty in the receipts of income.

Question 43

Consider the monetary transmission mechanism. A disturbance to monetary equilibrium which changes the interest rate will affect aggregate demand through

A)a movement along the investment demand function and a shift of the aggregate expenditure curve.
B)a movement along the aggregate expenditure curve.
C)movements along the investment demand function and the aggregate expenditure curve.
D)a shift of the investment demand function and a movement along the aggregate expenditure curve.
E)a shift of both the investment demand function and the aggregate expenditure curve.

Question 44

Consider the monetary transmission mechanism. Other things being equal, the steeper is the investment demand function, the

A)more responsive is desired investment to a change in the interest rate.
B)more responsive is the demand for money to a change in the interest rate.
C)less responsive is the demand for money to a change in the interest rate.
D)less responsive is desired investment to a change in the interest rate.
E)less responsive is the interest rate to a change in the money supply.

Question 45

If the Bank of Canada were to increase the money supply, other things being equal, we would expect the aggregate expenditure curve to shift

A)downward and the aggregate demand curve to shift to the right.
B)downward and the aggregate demand curve to shift to the left.
C)downward but the aggregate demand curve will remain unchanged.
D)upward and the aggregate demand curve to shift to the left.
E)upward and the aggregate demand curve to shift to the right.

Question 46

The linkage between changes in monetary equilibrium and changes in aggregate demand is called the

A)liquidity preference function.
B)monetary transmission mechanism.
C)transactions mechanism.
D)simple multiplier.
E)equilibrium mechanism.

Question 47

An increase in the money supply sets the monetary transmission mechanism in motion which results in

A)a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
B)a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
C)a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
D)a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
E)a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.

Question 48

The economy's investment demand function describes the

A)positive relationship between desired investment and the rate of interest.
B)positive relationship between desired investment, the rate of interest, and aggregate expenditure.
C)negative relationship between desired investment and aggregate expenditure.
D)negative relationship between the demand for money and the interest rate.
E)negative relationship between the interest rate and desired investment.

Question 49

The term "demand for money" usually refers to the

A)average person's desire to hold cash.
B)sum of all desired holdings of cash.
C)cash and deposits actually held by firms.
D)sum of all desired assets, including cash, bonds, and real property.
E)aggregate demand for money balances in the economy.

Question 50

The long- run neutrality of money implies that

A)in response to any change in the money supply, the economy's adjustment process will bring Y back to Y*, which is unaffected by the change in the money supply.
B)changes to the money supply have no effect on either the price level or real GDP.
C)in response to any change in the money supply, the demand for money will adjust to cancel out its effects on all macroeconomic variables.
D)changes to the money supply never have any effect on real GDP.
E)the economy's level of potential output will adjust to accommodate any change in the money supply.

Question 51

a reduction in the money supply.

A)2 only
B)1 or 2 or 3
C)1 or 2
D)1 only
E)3 only

Question 52

Classical economists' belief in the "neutrality of money" led them to argue that

A)a change in the quantity of money would change the price level but would not change relative prices.
B)absolute prices were determined in the real part of the economy.
C)relative prices have no role in the real allocation of resources.
D)a change in the quantity of money would not affect money prices or relative prices.
E)the allocation of resources was determined by the quantity of money and not by the forces of supply and demand.

Question 53

Changes in the money supply in an open economy, as compared to a closed economy,

A)are likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances.
B)are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports.
C)are the same in either situation.
D)affect investment to a greater degree because foreign investors can create new investment in an open economy.
E)cannot be determined with the available information.

Question 54

Monetary policy can have the largest impact on desired aggregate expenditures when the

A)investment demand curve is relatively flat and the money demand function is relatively steep.
B)investment demand curve and money demand function are both relatively flat.
C)investment demand curve and money demand function are both relatively steep.
D)investment demand curve is relatively steep and the money demand function is relatively flat.
E)none of the above -- monetary policy is always equally effective.

Question 55

If the annual interest rate is 8 percent, an asset that promises to pay $160 after each of the next two years has a present value of

A)$ 178.32.
B)$ 285.32.
C)$ 296.30.
D)$ 300.00.
E)$ 320.00.

Question 56

Which one of the following statements best describes the monetary transmission mechanism?

A)An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP.
B)A decrease in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP.
C)An increase in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP.
D)A decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate.
E)An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP.

Question 57

Monetary equilibrium occurs when the

A)the money supply is growing at a constant rate.
B)supply and demand for all goods in the economy are equal at the current rate of interest.
C)existing supply of money is willingly held by households and firms in the economy at the current rate of interest.
D)nominal rate of interest equals the real rate of interest.
E)growth in the money supply is zero.

Question 58

Consider a Government of Canada bond with a face value of $1000, and a present value of $925. If this bond is offered for sale at $960, then

A)the excess demand for the bond at $960 will drive the price up to the face value of the bond.
B)the equilibrium market price of this bond has been achieved.
C)the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925.
D)individuals will purchase the bond at the offer price which will drive the market rate of interest down.
E)individuals will purchase the bond at the offer price which will drive the market rate of interest up.

Question 59

A decrease in the money supply is most likely to

A)lower interest rates, raise investment, and raise aggregate expenditures.
B)raise interest rates and investment, and lower aggregate expenditures.
C)raise interest rates, investment, and aggregate expenditures.
D)raise interest rates, lower investment, and lower aggregate expenditures.
E)lower interest rates, investment, and aggregate expenditures.

Question 60

An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4 percent and the bond is being offered for sale at a price of $9800. The analyst should recommend

A)not purchasing the bond because the buyer could earn an additional $192 by investing the $9800 elsewhere
B)not purchasing the bond because the buyer could earn an additional $392 by investing the $9800 elsewhere.
C)not purchasing the bond because the price is lower than its present value.
D)purchasing the bond because the bond price is equal to its present value.
E)purchasing the bond because the buyer will earn a profit of $185.

Question 61

If real GDP falls, other things being equal, we can expect

A)an increase in precautionary demand for money.
B)an increase in transactions demand for money.
C)an increase in the speculative demand for money.
D)an increase in the total demand for money.
E)a decrease in transactions demand for money.

Question 62

The "precautionary demand" for money arises from the

A)desire to avoid paying interest on credit purchases.
B)fear that interest rates will fall.
C)fear that interest rates will rise.
D)uncertainty about when some expenditures will be necessary.
E)need to make predictable purchases of goods and services.

Question 63

Consider the monetary transmission mechanism. Other things being equal, the flatter is the investment demand function, the

A)less responsive is the demand for money to a change in interest rates.
B)more responsive is desired investment to a change in interest rates.
C)less responsive is the interest rate to a change in the money supply.
D)more responsive is the demand for money to a change in interest rates.
E)less responsive is desired investment to a change in interest rates.

Question 64

The proposition of long- run neutrality of money is supported by evidence over more than fifty years and many countries that there is a positive relationship between

A)inflation rates and interest rates.
B)inflation rates and money supply growth.
C)money supply growth and real GDP.
D)money supply growth and interest rates.
E)potential GDP and money supply growth.

Question 65

If the annual interest rate is 10 percent, $5.00 received today has the same present value as

A)$4.00 received one year from now.
B)$4.50 received one year from now.
C)$5.00 received one year from now.
D)$5.50 received one year from now.
E)$6.00 received one year form now.

Question 66

Which of the following best represents the view of the Classical economists regarding money?

A)The allocation of resources is affected by the money supply.
B)The monetary sector influences consumers' preferences and relative prices.
C)The distribution of income is affected by the money supply.
D)The economy is composed of the real sector and the monetary sector, and the latter does not affect the former.
E)Relative prices are determined by the money supply.

Question 67

If there are just two assets, bonds and money, then an excess demand for money implies

A)an excess supply of bonds.
B)nothing about conditions of demand for the other financial asset.
C)equilibrium in the bond market.
D)an excess demand for bonds.
E)an indeterminate equilibrium in the bond market.

Question 68

Which of the following is partly responsible for the negative slope of the aggregate demand (AD)curve?

A)the multiplier effect
B)the monetary transmission mechanism
C)the speculative demand for money
D)the precautionary demand for money
E)open- market operations of the Bank of Canada

Question 69

The demand for money (M_D)function defines the relationship between

A)the quantity of money demanded and the rate of interest.
B)interest rates and bond prices.
C)the quantity of money demanded and the price level.
D)inflation and bond prices.
E)interest rates and financial assets.

Question 70

In a competitive financial market, the equilibrium price of an asset will equal the

A)present value of the asset.
B)issue price of the asset.
C)future value of the asset multiplied by the interest rate.
D)sum of present value of the asset multiplied by the interest rate.
E)future value of the asset.

Question 71

Other things being equal, the transactions demand for money tends to increase when

A)the price level falls.
B)interest rates stop rising.
C)national income falls.
D)national income rises.
E)interest rates rise.

Question 72

Which of the following statements best describes the difference between the Classical and modern views regarding the role of money in the economy?

A)Unlike modern economists, Classical economists believed that the neutrality of money existed only in the long run.
B)Both Classical and modern economists accept the neutrality of money in the long run, but modern economists question neutrality in the short run.
C)Both Classical and modern economists accept the neutrality of money in the short run, but modern economists question neutrality in the long run.
D)Both schools of thought accept the neutrality of money within the economy.
E)Classical economists argued that relative prices are determined by the supply of money, while modern economists believe that the money supply will never affect relative prices.

Question 73

Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time)and also repays the face value of $2000 at the end of the third year. If the market interest rate is 6 percent, what is the present value of this bond?

A)$1854.67
B)$1763.22
C)$283.02
D)$1946.53
E)$267.30

Question 74

The present value of a bond is determined by the

A)market rate of interest only.
B)marginal rate of income tax.
C)market rate of interest, the date of maturity, and the face value.
D)face value and the date of maturity.
E)rate of inflation.

Question 75

Other things being equal, a reduction in the money supply will lead to a

A)rise in the rate of interest and no change in investment expenditure.
B)fall in the rate of interest and an increase in investment expenditure.
C)rise in the rate of interest and in increase in investment expenditure.
D)rise in the rate of interest and a decrease in investment expenditure.
E)fall in the rate of interest and a decrease in investment expenditure.

Question 76

According to the "liquidity preference" theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will

A)rise as the rate of interest falls.
B)fall as the rate of interest falls.
C)rise as the rate of interest rises.
D)stay the same.
E)fall as the rate of interest rises.

Question 77

Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time)and also repays the face value of $2000 at the end of the third year. If the market interest rate is 4 percent, what is the present value of this bond?

A)$1966.39
B)$1866.67
C)$2055.50
D)$1941.57
E)$288.45

Question 78

The opportunity cost of holding money rather than bonds is

A)zero -- there is no opportunity cost of holding money.
B)the rate of interest earned on bonds.
C)forgone consumption.
D)forgone liquidity.
E)the price level.

Question 79

Consider the monetary transmission mechanism in an open economy. Other things being equal, a decrease in the domestic money supply leads to

A)an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand.
B)a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
C)an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand.
D)an appreciation of the domestic currency, thereby inhibiting net exports and reducing aggregate demand.
E)a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand.

Question 80

If the general price level were to increase, other things being equal, the money demand function would

A)shift to the right.
B)become steeper but not shift.
C)shift to the left.
D)not be affected.
E)shift, but the direction of the shift cannot be predicted.