Question 1

The loanable funds framework is easier to use when analyzing the effects of changes in ________,while the liquidity preference framework provides a simpler analysis of the effects from changes in income,the price level,and the supply of ________.
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) the supply of money; bonds

Accepted Answer

The loanable funds framework is primarily used to analyze the effects of changes in expected inflation, while the liquidity preference framework is used to analyze the effects of changes in income, the price level, and the supply of money. Therefore, option B is the most relevant choice, as it specifies changes in the supply of money - which can be analyzed using the liquidity preference framework.

Question 2

A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise

Accepted Answer

When the expected rate of inflation decreases, the demand for bonds increases since they become more attractive investment options due to the expected lower rate of inflation eroding their value. This causes bond prices to rise and, therefore, the supply of bonds to fall as investors hold onto their bonds, expecting to sell them at higher prices in the future.

Question 3

Figure 4.2
 
-In Figure 4.2,one possible explanation for a decrease in the interest rate from i? t? i? is
A) an increase in government budget deficits.
B) an increase in expected inflation.
C) a decrease in economic growth.
D) a decrease in the riskiness of bonds relative to other investments.

Accepted Answer

The answer of Figure 4.2
 
-In Figure 4.2,one possible explanation...

Question 4

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

Accepted Answer

In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms: money and bonds. Money is the most liquid asset and is preferred for transactions, whereas bonds are less liquid but generate income in the form of interest.

Question 5

When the economy slips into a recession,normally the demand for bonds ________,the supply of bonds ________,and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; falls
D) decreases; increases; rises

Accepted Answer

When the economy slips into a recession, normally the demand for bonds decreases, the supply of bonds decreases, and the interest rate falls.

Question 6

When the economy enters into a boom,normally the demand for bonds ________, the supply of bonds ________,and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls
C) increases; decreases; rises
D) decreases; increases; rises

Accepted Answer

During an economic boom, the demand for bonds increases as investors seek to invest in growing markets, the supply of bonds also increases as companies and governments issue more bonds to finance expansion, and the interest rate rises due to increased demand for borrowing.

Question 7

Figure 4.4
 
-In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is
A) an increase in the price of bonds.
B) a business cycle boom.
C) an increase in the expected inflation rate.
D) a decrease in the expected inflation rate.

Accepted Answer

An increase in the expected inflation rate would shift the demand curve for bonds to the left, causing the equilibrium interest rate to increase from i? to i?. This is because investors would demand a higher interest rate to compensate for the expected loss in purchasing power due to inflation. A decrease in the expected inflation rate would shift the demand curve for bonds to the right, causing the equilibrium interest rate to decrease. A business cycle boom or an increase in the price of bonds would not directly cause an increase in the equilibrium interest rate.

Question 8

Figure 4.4
 
-In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is a(n)________ in the ________.
A) increase; expected inflation rate
B) decrease; expected inflation rate
C) increase; government budget deficit
D) decrease; government budget deficit

Accepted Answer

An increase in expected inflation rate would cause an increase in the equilibrium interest rate to compensate for the decrease in purchasing power of the money lent or invested.

Question 9

Figure 4.2
 
-In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is a(n)________ in ________.
A) increase; the expected inflation rate
B) decrease; the expected inflation rate
C) increase; economic growth
D) decrease; economic growth

Accepted Answer

The answer of Figure 4.2
 
-In Figure 4.2,one possible explanation...

Question 10

In his liquidity preference framework,Keynes assumed that money has a zero rate of return; thus,when interest rates ________ the expected return on money falls relative to the expected return on bonds,causing the demand for money to ________.
A) rise; fall
B) rise; rise
C) fall; fall
D) fall; rise

Accepted Answer

When interest rates rise, the return on bonds increases compared to the zero return on money, leading to a decrease in the demand for money as people prefer to hold bonds instead.

Question 11

When the federal government's budget deficit decreases,the ________ curve for bonds shifts to the ________.
A) demand; right
B) demand; left
C) supply; left
D) supply; right

Accepted Answer

When the federal government's budget deficit decreases, it means the government needs to borrow less money, leading to a decrease in the supply of bonds. This is represented by a leftward shift in the supply curve for bonds.

Question 12

Factors that can cause the supply curve for bonds to shift to the left include
A) an expansion in overall economic activity.
B) a decrease in expected inflation.
C) an increase in government deficits.
D) only A and C of the above.

Accepted Answer

A decrease in expected inflation reduces the cost of borrowing, leading to a decrease in the supply of bonds as issuers are less inclined to issue new bonds.

Question 13

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) all of the above.
E) only A and B of the above.

Accepted Answer

An expansion in overall economic activity can increase the supply of bonds as businesses and governments issue more bonds to finance growth and investment.

Question 14

Figure 4.2
 
-In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is
A) an increase in economic growth.
B) an increase in government budget deficits.
C) a decrease in government budget deficits.
D) a decrease in economic growth.
E) a decrease in the riskiness of bonds relative to other investments.

Accepted Answer

An increase in economic growth can lead to higher interest rates as demand for borrowing increases, pushing up the cost of borrowing.

Question 15

When the inflation rate is expected to increase,the expected return on bonds relative to real assets falls for any given interest rate; as a result,the ________ bonds falls and the ________ curve shifts to the left.
A) demand for; demand
B) demand for; supply
C) supply of; demand
D) supply of; supply

Accepted Answer

When inflation is expected to increase, the real value of the fixed payments from bonds decreases, making them less attractive compared to real assets. This leads to a decrease in the demand for bonds, not a change in their supply. Therefore, the demand curve for bonds shifts to the left.

Question 16

The economist Irving Fisher,after whom the Fisher effect is named,explained why interest rates ________ as the expected rate of inflation ________.
A) rise; increases
B) rise; stabilizes
C) rise; decreases
D) fall; increases
E) fall; stabilizes

Accepted Answer

According to the Fisher effect theory, interest rates rise as the expected rate of inflation increases. This is because lenders and investors require compensation for the expected erosion of purchasing power caused by inflation.

Question 17

Figure 4.4
 
-In Figure 4.4,the most likely cause of a decrease in the equilibrium interest rate from i? t? i? is
A) an increase in the expected inflation rate.
B) a decrease in the expected inflation rate.
C) a business cycle expansion.
D) a combination of both A and C of the above.

Accepted Answer

In Figure 4.4, a decrease in the equilibrium interest rate from i?t?i? is caused by a decrease in the expected inflation rate. This can be seen as the demand curve for loanable funds shifts to the left, indicating a decrease in the demand for funds at a given interest rate. This in turn reduces the equilibrium interest rate. A decrease in the expected inflation rate reduces the expected real interest rate, making investment more profitable and thus increasing demand for loanable funds.

Question 18

An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise

Accepted Answer

An increase in the expected rate of inflation reduces the real return that investors can earn from holding a bond with a fixed nominal interest rate. This makes investing in bonds less attractive, leading to a decline in demand. At the same time, the bond issuers may see the opportunity to issue new bonds at higher nominal interest rates to offset the anticipated higher inflation, so they increase the supply of bonds. Therefore, the demand for bonds falls, while the supply rises.

Question 19

When comparing the loanable funds and liquidity preference frameworks of interest rate determination,which of the following is true?
A) The liquidity preference framework is easier to use when analyzing the effects of changes in expected inflation.
B) The loanable funds framework provides a simpler analysis of the effects of changes in income, the price level, and the supply of money.
C) In most instances, the two approaches to interest rate determination yield the same predictions.
D) All of the above are true.
E) Only A and B of the above are true.

Accepted Answer

Both frameworks generally yield the same predictions regarding interest rate determination, despite their different approaches.

Question 20

When the inflation rate is expected to increase,the real cost of borrowing declines at any given interest rate; as a result,the ________ bonds increases and the ________ curve shifts to the right.
A) demand for; demand
B) demand for; supply
C) supply of; demand
D) supply of; supply

Accepted Answer

When inflation is expected to increase, the real cost of borrowing decreases, making it cheaper to borrow. This leads to an increase in the supply of bonds as borrowers are more willing to issue bonds, shifting the supply curve to the right.

Quiz 4: Why Do Interest Rates Change?

The loanable funds framework is easier to use when analyzing the effects of changes in ,while the liquidity preference framework provides a simpler analysis of the effects from changes in income,the price level,and the supply of .

A decrease in the expected rate of inflation causes the demand for bonds to and the supply of bonds to .

Figure 4.2 -In Figure 4.2,one possible explanation for a decrease in the interest rate from i? t? i? is

In Keynes's liquidity preference framework,individuals are assumed to hold their wealth in two forms:

When the economy slips into a recession,normally the demand for bonds ,the supply of bonds ,and the interest rate .

When the economy enters into a boom,normally the demand for bonds , the supply of bonds ,and the interest rate .

Figure 4.4 -In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is

Figure 4.4 -In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is a(n) in the .

Figure 4.2 -In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is a(n) in .

In his liquidity preference framework,Keynes assumed that money has a zero rate of return; thus,when interest rates the expected return on money falls relative to the expected return on bonds,causing the demand for money to .

When the federal government's budget deficit decreases,the curve for bonds shifts to the .

Factors that can cause the supply curve for bonds to shift to the left include

Factors that can cause the supply curve for bonds to shift to the right include

Figure 4.2 -In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is

When the inflation rate is expected to increase,the expected return on bonds relative to real assets falls for any given interest rate; as a result,the bonds falls and the curve shifts to the left.

The economist Irving Fisher,after whom the Fisher effect is named,explained why interest rates as the expected rate of inflation .

Figure 4.4 -In Figure 4.4,the most likely cause of a decrease in the equilibrium interest rate from i? t? i? is

An increase in the expected rate of inflation causes the demand for bonds to and the supply for bonds to .

When comparing the loanable funds and liquidity preference frameworks of interest rate determination,which of the following is true?

When the inflation rate is expected to increase,the real cost of borrowing declines at any given interest rate; as a result,the bonds increases and the curve shifts to the right.

Quiz 4: Why Do Interest Rates Change?

The loanable funds framework is easier to use when analyzing the effects of changes in ________,while the liquidity preference framework provides a simpler analysis of the effects from changes in income,the price level,and the supply of ________.

A decrease in the expected rate of inflation causes the demand for bonds to ________ and the supply of bonds to ________.

Figure 4.2 -In Figure 4.2,one possible explanation for a decrease in the interest rate from i? t? i? is

In Keynes's liquidity preference framework,individuals are assumed to hold their wealth in two forms:

When the economy slips into a recession,normally the demand for bonds ________,the supply of bonds ________,and the interest rate ________.

When the economy enters into a boom,normally the demand for bonds ________, the supply of bonds ________,and the interest rate ________.

Figure 4.4 -In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is

Figure 4.4 -In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is a(n) ________ in the ________.

Figure 4.2 -In Figure 4.2,one possible explanation for the increase in the interest rate from i? to i? is a(n) ________ in ________.

In his liquidity preference framework,Keynes assumed that money has a zero rate of return; thus,when interest rates ________ the expected return on money falls relative to the expected return on bonds,causing the demand for money to ________.

When the federal government's budget deficit decreases,the ________ curve for bonds shifts to the ________.