Question 1

An increase in the money supply will lower the equilibrium rate of interest.

Accepted Answer

An increase in the money supply leads to an increase in the supply of loanable funds. This reduces the equilibrium rate of interest, as borrowers can now obtain loans at lower rates.

Question 2

Using a money market diagram and a diagram of aggregate demand and aggregate supply, explain how the Fed can eliminate a recessionary gap. Be sure to include in your answer a discussion of what happens to the money supply, interest rates, and the components of aggregate demand.

Accepted Answer

The answer of Using a money market diagram and a...

Question 3

If the prices of bonds go up, the interest rates will fall and the quantity of investment demanded will rise.

Accepted Answer

When the prices of bonds go up, it means that there is more demand for the bonds, which reduces the yield (interest rate) they offer. This leads to a decrease in interest rates, which makes investments in other assets, such as stocks or real estate, less attractive compared to bonds. This, in turn, increases the quantity of investment demanded in bonds.

Question 4

The demand curve for money shows the quantity of money demanded at each interest rate, all other things unchanged.

Accepted Answer

The demand curve for money is a graphical representation that shows the relationship between the quantity of money demanded and the interest rate.

Question 5

When the Fed sells government bonds in the open market, interest rates will rise.

Accepted Answer

When the Fed sells government bonds in the open market, it decreases the amount of money available in the economy. This decrease in money supply increases the demand for borrowing, which leads to an increase in interest rates.

Question 6

Explain the link between U.S. interest rates, the dollar exchange rate, and net exports. Explain why high interest rates in the United States cause net exports to fall and low interest rates cause net exports to rise?

Accepted Answer

The answer of Explain the link between U.S. interest rates,...

Question 7

A rise in bond prices would cause the price of a dollar to rise.

Accepted Answer

A rise in bond prices would actually cause the price of a dollar to fall. When bond prices rise, interest rates fall, causing the demand for the currency to decrease and therefore its value to depreciate.

Question 8

Explain what happens in the bond market when the Fed conducts an open market purchase. A complete answer should explain what happens to bond prices, the quantity of bonds traded and the interest rate. Illustrate your answer with a demand-supply graph of the bond market.

Accepted Answer

The answer of Explain what happens in the bond market...

Question 9

Using a money market diagram and a diagram of aggregate demand and aggregate supply, explain how the Fed can eliminate an inflationary gap. Be sure to include in your answer a discussion of what happens to the money supply, interest rates, and the components of aggregate demand.

Accepted Answer

The answer of Using a money market diagram and a...

Question 10

Why is there a negative relationship between the interest rate and the quantity of money demanded?

Accepted Answer

The answer of Why is there a negative relationship between...

Question 11

The Fed could conduct an open market purchase to eliminate an inflationary gap.

Accepted Answer

The answer of The Fed could conduct an open market...

Question 12

As a result of an increase in the money supply, the aggregate demand will shift to the left.

Accepted Answer

An increase in the money supply would lead to a decrease in interest rates, which would increase investment and consumer spending, leading to an increase in aggregate demand. Therefore, the statement is false.

Question 13

The transactions demand for money is the money households and firms hold in order to pay for goods and services they buy.

Accepted Answer

The statement accurately describes the transactions demand for money.

Question 14

The Fed could conduct an open market sale to eliminate an inflationary gap.

Accepted Answer

An open market sale refers to the process by which the Federal Reserve sells government securities to reduce the money supply in circulation. This reduction in the money supply can help eliminate an inflationary gap by decreasing consumer spending and thus reducing the overall demand for goods and services. Therefore, the statement is true.

Question 15

Explain the relationships among the face value of a bond, the price of a bond, and the interest rate paid on the bond.

Accepted Answer

The answer of Explain the relationships among the face value...

Quiz 10: Financial Markets and the Economy