Question 1

If the demand for money is $300 billion and the supply of money is $200 billion, then the interest rate will:

Accepted Answer

When the demand for money is greater than the supply of money, there is a shortage of money. This shortage causes the interest rate to rise as borrowers are willing to pay more to borrow money, while lenders can charge higher interest rates to make up for the scarcity. Therefore, in this scenario, the interest rate will rise.

Question 2

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____.

Accepted Answer

When the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money increases, as people can now earn more by investing in CDs rather than holding onto money. As a result, the quantity demanded of money will decrease, as people will want to hold less money and invest more in CDs.

Question 3

A change in _____ does NOT shift the money demand curve.

Accepted Answer

The interest rate does not shift the money demand curve; instead, it moves along the curve because it represents the cost of holding money versus holding other assets. Changes in the price level, banking technology, and real GDP can shift the money demand curve by affecting the quantity of money people want to hold.

Question 4

If the aggregate price level doubles:

Accepted Answer

When the aggregate price level doubles, the purchasing power of money decreases. Therefore, individuals and firms will demand more money to facilitate their purchases. This results in an increase in money demand at the same interest rate. As a result, the money supply has to increase to meet the higher demand, so money demand at any given interest rate will double.

Question 5

Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect:

Accepted Answer

During a recession, people tend to hold onto their money rather than spend it, causing a decrease in the demand for money. Therefore, the money demand curve would shift inward.

Question 6

All of the following factors will shift the money demand curve EXCEPT:

Accepted Answer

Changes in the interest rate do not shift the money demand curve; instead, they cause movement along the curve.

Question 7

In the liquidity preference model, the money supply is represented by:

Accepted Answer

In the liquidity preference model, the money supply is assumed to be fixed by the central bank and is represented by a vertical line. This is because changes in interest rates do not affect the supply of money in the short run, as it is determined solely by the central bank's actions.

Question 8

The quantity demanded of money is negatively related to _____, and the demand for money is positively related to _____.

Accepted Answer

The quantity demanded of money refers to how much money people want to hold onto. As the interest rate rises, the opportunity cost of holding onto money increases, and people will demand less of it. On the other hand, as real GDP increases, people's income rises and they consequently want to hold onto more money, leading to an increase in demand for money.

Question 9

The federal funds rate is the interest rate on _____, and it is controlled by the _____.

Accepted Answer

The federal funds rate is the interest rate at which banks lend reserves to each other overnight, and it is controlled by the Federal Open Market Committee (FOMC).

Question 10

A high demand for money (as in Japan) would result from:

Accepted Answer

A high demand for money can be influenced by factors such as low crime rates, which make people feel safer holding cash, and a lack of infrastructure to accept non-cash payments, necessitating the use of cash for transactions.

Question 11

The demand for money is higher in Japan than in the United States because:

Accepted Answer

The demand for money is higher when interest rates are lower. Therefore, Japanese interest rates being lower than those in the United States is the reason for the higher demand for money in Japan.

Question 12

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _____, and this leads to a _____ in the interest rate.

Accepted Answer

When the interest rate rises above its equilibrium, the quantity demanded of nonmonetary interest-bearing financial assets increases because they become more attractive compared to holding money. This increased demand for such assets puts downward pressure on interest rates, leading them to fall back towards equilibrium.

Question 13

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, money demanded is _____ than money supplied.

Accepted Answer

At an interest rate of 2%, which is below the equilibrium rate of 5%, the quantity of money demanded will be greater than the quantity of money supplied, as people will want to hold more money due to the lower opportunity cost of holding money.

Question 14

Among the factors that could cause money demand to shift are all of the following EXCEPT:

Accepted Answer

Interest rates do not cause the money demand curve to shift; instead, they cause movement along the curve.

Question 15

The demand curve for money will shift to the right because of a:

Accepted Answer

A rise in real GDP increases the demand for transactions, which in turn increases the demand for money, shifting the demand curve to the right.

Question 16

The demand for money is higher in Japan than in the United States because:

Accepted Answer

Most stores in Japan not accepting credit cards means consumers need to carry more cash for daily transactions, increasing the demand for physical money.

Question 17

Suppose a typical basket of goods is now more expensive than it used to be. All else equal, we would expect:

Accepted Answer

When prices rise, individuals and firms require more money to purchase the same basket of goods, shifting the demand for money outward. This is because they need more money to maintain their level of purchases, which increases the demand for money.

Question 18

Which of the following is NOT one of the reasons that the Japanese tend to keep large amounts of cash?

Accepted Answer

Option A states that banks have invested heavily in credit card technology, which would provide the Japanese with easy access to electronic payment options. This is a reason that contradicts the idea that Japanese people tend to keep large amounts of cash. The remaining options (B, C, and D) provide plausible reasons for Japanese people keeping cash, such as the low crime rate (B), low-interest rates (C), and prevalence of mom-and-pop stores that don't accept credit cards (D).

Question 19

If the demand for money is $100 billion and the supply of money is $200 billion, then the interest rate will:

Accepted Answer

When the supply of money exceeds the demand, the interest rate tends to fall as there is more money available than needed, leading to lower borrowing costs.

Question 20

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect:

Accepted Answer

The answer of Every year more and more purchases are...

Quiz 15: Monetary Policy

If the demand for money is $300 billion and the supply of money is $200 billion, then the interest rate will:

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _ and the quantity demanded of money will _.

A change in _____ does NOT shift the money demand curve.

If the aggregate price level doubles:

Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect:

All of the following factors will shift the money demand curve EXCEPT:

In the liquidity preference model, the money supply is represented by:

The quantity demanded of money is negatively related to _, and the demand for money is positively related to _.

The federal funds rate is the interest rate on _, and it is controlled by the _.

A high demand for money (as in Japan) would result from:

The demand for money is higher in Japan than in the United States because:

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _, and this leads to a _ in the interest rate.

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, money demanded is _____ than money supplied.

Among the factors that could cause money demand to shift are all of the following EXCEPT:

The demand curve for money will shift to the right because of a:

The demand for money is higher in Japan than in the United States because:

Suppose a typical basket of goods is now more expensive than it used to be. All else equal, we would expect:

Which of the following is NOT one of the reasons that the Japanese tend to keep large amounts of cash?

If the demand for money is $100 billion and the supply of money is $200 billion, then the interest rate will:

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect: