Question 1

The opportunity cost of holding money
A)decreases when the interest rate decreases,so people desire to hold more of it.
B)decreases when the interest rate decreases,so people desire to hold less of it.
C)increases when the interest rate decreases,so people desire to hold more of it.
D)increases when the interest rate decreases,so people desire to hold less of it.

Accepted Answer

When the interest rate decreases, the opportunity cost of holding money decreases because people are giving up less interest income by holding money instead of investing it. Therefore, people desire to hold more money.

Question 2

Liquidity refers to
A)the relation between the price and interest rate of an asset.
B)the risk of an asset relative to its selling price.
C)the ease with which an asset is converted into a medium of exchange.
D)the sensitivity of investment spending to changes in the interest rate.

Accepted Answer

Liquidity is the degree to which an asset can be easily bought or sold in the market without affecting its price. It refers to the ease with which an asset can be converted into cash or a medium of exchange. Therefore, option C is the correct choice as it defines liquidity accurately. Option A refers to the relationship between an asset's price and interest rate, while option B defines an asset's risk relative to its selling price. Option D refers to the responsiveness of investment spending to changes in the interest rate. None of these options accurately represents the meaning of liquidity.

Question 3

When the interest rate increases,the opportunity cost of holding money
A)increases,so the quantity of money demanded increases.
B)increases,so the quantity of money demanded decreases.
C)decreases,so the quantity of money demanded increases.
D)decreases,so the quantity of money demanded decreases.

Accepted Answer

When interest rates increase, the return on holding money (in the form of interest earned on savings accounts, bonds, etc.) also increases. This means that the opportunity cost of holding money increases, as individuals will have to forgo earning that interest if they choose to hold onto their money instead. As a result, people tend to demand less money when interest rates increase, leading to a decrease in the quantity of money demanded.

Question 4

Figure 34-1 
-Refer to Figure 34-1.Which of the following is correct?
A)If the interest rate is 4 percent,there is excess money demand,and the interest rate will fall.
B)If the interest rate is 3 percent,there is excess money supply,and the interest rate will rise.
C)Starting with an interest rate of 4 percent,the demand for goods and services will increase until the money market reaches a new equilibrium.
D)None of the above is correct.

Accepted Answer

The answer of Figure 34-1 
-Refer to Figure 34-1.Which of...

Question 5

According to liquidity preference theory,the opportunity cost of holding money is
A)the interest rate on bonds.
B)the inflation rate.
C)the cost of converting bonds to a medium of exchange.
D)the difference between the inflation rate and the interest rate on bonds.

Accepted Answer

Liquidity preference theory states that the opportunity cost of holding money is the interest rate on bonds. The theory suggests that people prefer to hold money because it is the most liquid asset and is readily acceptable for transactions. However, holding money means giving up the interest that could have been earned on bonds, which is the opportunity cost. Therefore, the higher the interest rate on bonds, the higher the opportunity cost of holding money, and the lower the demand for money.

Question 6

According to liquidity preference theory,the slope of the money demand curve is explained as follows:
A)Interest rates rise as the Fed reduces the quantity of money demanded.
B)Interest rates fall as the Fed reduces the supply of money.
C)People will want to hold less money as the cost of holding it falls.
D)People will want to hold more money as the cost of holding it falls.

Accepted Answer

According to liquidity preference theory, as the cost of holding money (i.e. interest rates) falls, people will want to hold more money. Therefore, the slope of the money demand curve is downward sloping.

Question 7

Figure 34-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
. 
-Refer to Figure 34-2.What is measured along the horizontal axis of the left-hand graph?
A)nominal output
B)real output
C)the opportunity cost of holding money
D)the quantity of money

Accepted Answer

The horizontal axis of the left-hand graph measures the quantity of money.

Question 8

Figure 34-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
. 
-Refer to Figure 34-2.What does Y represent on the horizontal axis of the right-hand graph?
A)the quantity of money
B)the rate of inflation
C)real output
D)nominal output

Accepted Answer

Y represents real output on the horizontal axis of the right-hand graph, which is typically measured in terms of Gross Domestic Product (GDP).

Question 9

In which of the following cases would the quantity of money demanded be largest?
A)r = 0.03,P = 1.2
B)r = 0.03,P = 1.3
C)r = 0.04,P = 1.2
D)r = 0.05,P = 0.9

Accepted Answer

The quantity of money demanded is positively related to the price level and negatively related to the interest rate. Therefore, the largest quantity of money demanded would occur when the interest rate is lower (in this case, all options have the same interest rate of 0.03) and the price level is higher. Option B has the highest price level (P = 1.3) among the given choices, so it would result in the largest quantity of money demanded.

Question 10

According to liquidity preference theory,a decrease in money demand for some reason other than a change in the price level causes
A)the interest rate to fall,so aggregate demand shifts right.
B)the interest rate to fall,so aggregate demand shifts left.
C)the interest rate to rise,so aggregate demand shifts right.
D)the interest rate to rise,so aggregate demand shifts left.

Accepted Answer

According to liquidity preference theory, a decrease in money demand (i.e. people want to hold less money) will cause an excess supply of money in the market, resulting in a decrease in the interest rate. As the interest rate falls, the cost of borrowing decreases, encouraging investment and consumption, which will shift aggregate demand to the right.

Question 11

When the interest rate decreases,the opportunity cost of holding money
A)increases,so the quantity of money demanded increases.
B)increases,so the quantity of money demanded decreases.
C)decreases,so the quantity of money demanded increases.
D)decreases,so the quantity of money demanded decreases.

Accepted Answer

The answer of When the interest rate decreases,the opportunity cost...

Question 12

According to liquidity preference theory,
A)an increase in the interest rate reduces the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the price level shifts money demand to the right.
B)an increase in the interest rate increases the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the price level shifts money demand leftward.
C)an increase in the price level reduces the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the interest rate shifts money demand rightward.
D)an increase in the price level increases the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the interest rate shifts money demand leftward.

Accepted Answer

According to the liquidity preference theory, an increase in interest rates will reduce the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level will shift money demand to the right (not leftward). Therefore, option A is the correct answer.

Question 13

In which of the following cases would the quantity of money demanded be smallest?
A)r = 0.06,P = 1.2
B)r = 0.05,P = 1.0
C)r = 0.04,P = 1.2
D)r = 0.06,P = 1.0

Accepted Answer

The quantity of money demanded is typically smaller when the interest rate (r) is higher and the price level (P) is lower, as a higher interest rate increases the opportunity cost of holding money (leading to less money being held) and a lower price level decreases the amount of money needed for transactions. Option D has the highest interest rate and the lowest price level.

Question 14

People hold money primarily because it
A)increases in value when there is inflation.
B)serves as a store of value.
C)serves as a medium of exchange.
D)functions as a unit of account.

Accepted Answer

The answer of People hold money primarily because it
A)increases in...

Question 15

When households decide to hold more money,
A)interest rates fall and investment decreases.
B)interest rates fall and investment increases.
C)interest rates rise and investment increases.
D)interest rates rise and investment decreases.

Accepted Answer

When households decide to hold more money, the demand for money increases which leads to a decrease in the supply of lendable funds. This causes the interest rates to rise, making it more expensive to borrow for investment purposes. As a result, investment decreases.

Question 16

Figure 34-1 
-Refer to Figure 34-1.If the current interest rate is 2 percent,
A)there is an excess supply of money.
B)people will sell more bonds,which drives interest rates up.
C)as the money market moves to equilibrium,people will buy more goods.
D)All of the above are correct.

Accepted Answer

The answer of Figure 34-1 
-Refer to Figure 34-1.If the...

Question 17

According to the theory of liquidity preference,which variable adjusts to balance the supply and demand for money?
A)interest rate
B)money supply
C)quantity of output
D)price level

Accepted Answer

The answer of According to the theory of liquidity preference,which...

Question 18

If people decide to hold less money,then
A)money demand decreases,there is an excess supply of money,and interest rates rise.
B)money demand decreases,there is an excess supply of money,and interest rates fall.
C)money demand increases,there is an excess demand for money,and interest rates fall.
D)money demand increases,there is an excess demand for money,and interest rates rise.

Accepted Answer

When people decide to hold less money, the demand for money decreases which leads to an excess supply of money in the market. As a result, interest rates fall as lenders try to attract borrowers by offering lower interest rates.

Question 19

Figure 34-1 
-Refer to Figure 34-1.There is an excess demand for money at an interest rate of
A)2 percent.
B)3 percent.
C)4 percent.
D)None of the above is correct.

Accepted Answer

At an interest rate of 2 percent, the demand for money exceeds the supply, creating an excess demand for money.

Question 20

People are likely to want to hold more money if the interest rate
A)increases,making the opportunity cost of holding money rise.
B)increases,making the opportunity cost of holding money fall.
C)decreases,making the opportunity cost of holding money rise.
D)decreases,making the opportunity cost of holding money fall.

Accepted Answer

The answer of People are likely to want to hold...

Quiz 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: How Monetary Policy Influences Aggregate Demand

The opportunity cost of holding money

Liquidity refers to

When the interest rate increases,the opportunity cost of holding money

Figure 34-1 -Refer to Figure 34-1.Which of the following is correct?

According to liquidity preference theory,the opportunity cost of holding money is

According to liquidity preference theory,the slope of the money demand curve is explained as follows:

In which of the following cases would the quantity of money demanded be largest?

According to liquidity preference theory,a decrease in money demand for some reason other than a change in the price level causes

When the interest rate decreases,the opportunity cost of holding money

According to liquidity preference theory,

In which of the following cases would the quantity of money demanded be smallest?

People hold money primarily because it

When households decide to hold more money,

Figure 34-1 -Refer to Figure 34-1.If the current interest rate is 2 percent,

According to the theory of liquidity preference,which variable adjusts to balance the supply and demand for money?

If people decide to hold less money,then

Figure 34-1 -Refer to Figure 34-1.There is an excess demand for money at an interest rate of

People are likely to want to hold more money if the interest rate