Question 1

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.
A)liquidity
B)price level
C)expected-inflation
D)income

Accepted Answer

The lower interest rates resulting from an increase in the money supply increase the availability of funds, making it more liquid. This is known as the liquidity effect, as identified by Milton Friedman.

Question 2

In the liquidity preference framework,a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs
A)at the moment the price level hits its peak (stops rising)because both the price level and expected inflation effects are at work.
B)immediately after the price level begins to rise,because both the price level and expected inflation effects are at work.
C)at the moment the expected inflation rate hits its peak.
D)at the moment the inflation rate hits it peak.

Accepted Answer

The maximum impact on interest rates in the liquidity preference framework occurs at the moment the price level hits its peak because at this point, both the direct effect of the price level on interest rates and the expectations of future inflation are influencing interest rates. The direct effect comes from the increased money supply leading to higher prices, and the expectation effect comes from people anticipating further inflation, both of which work together to influence interest rates most strongly at this point.

Question 3

Of the four effects on interest rates from an increase in the money supply,the one that works in the opposite direction of the other three is the
A)liquidity effect.
B)income effect.
C)price level effect.
D)expected inflation effect.

Accepted Answer

The liquidity effect of an increase in the money supply tends to lower interest rates because more money available means cheaper borrowing costs. This effect works in the opposite direction of the income effect, price level effect, and expected inflation effect, which all tend to increase interest rates due to higher demand for goods, higher prices, and expectations of future inflation, respectively.

Question 4

Use the following figure to answer the question :

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by
A)a decrease in money growth.
B)an increase in money growth.
C)a decline in the expected price level.
D)an increase in income.

Accepted Answer

An increase in money growth typically leads to a higher supply of money, which can result in lower interest rates as there is more money available for borrowing.

Question 5

In the market for money,when the Fed ________ the money stock,the money supply curve shifts to the ________ and the interest rate ________,everything else held constant.
A)decreases;right;rises
B)increases;right;falls
C)decreases;left;falls
D)increases;left;rises

Accepted Answer

When the Federal Reserve (Fed) increases the money stock, the money supply curve shifts to the right, leading to a decrease in interest rates, assuming all other factors remain constant. This is because an increase in the money supply reduces the cost of borrowing money, which is reflected in lower interest rates.

Question 6

When the growth rate of the money supply increases,interest rates end up being permanently lower if
A)the liquidity effect is larger than the other effects.
B)there is fast adjustment of expected inflation.
C)there is slow adjustment of expected inflation.
D)the expected inflation effect is larger than the liquidity effect.

Accepted Answer

The liquidity effect refers to the immediate, short-term impact of an increase in the money supply, which typically leads to lower interest rates as more funds are available for lending. If the liquidity effect is larger than other effects (such as the expected inflation effect, which can lead to higher interest rates as lenders demand higher returns to compensate for reduced purchasing power), then the initial decrease in interest rates can be sustained, leading to permanently lower interest rates.

Question 7

Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?

Accepted Answer

The answer of Using the liquidity preference framework,what will happen...

Question 8

________ in the money supply in the market for money creates excess demand for ________,causing interest rates to ________,everything else held constant.
A)An increase;money;rise
B)An increase;bonds;fall
C)A decrease;bonds;rise
D)A decrease;money;fall

Accepted Answer

An increase in the money supply creates excess supply of money, leading to lower interest rates as people have more money to lend. Lower interest rates make bonds more attractive, as the cost of borrowing decreases.

Question 9

Use the following figure to answer the question :

-In the figure above,one factor NOT responsible for the decline in the demand for money is
A)a decline the price level.
B)a decline in income.
C)an increase in income.
D)a decline in the expected inflation rate.

Accepted Answer

An increase in income would typically lead to an increase in the demand for money, as people have more money to spend and thus require more liquidity. The other factors listed - a decline in the price level, a decline in income, and a decline in the expected inflation rate - could all potentially lead to a decrease in the demand for money.

Question 10

Use the following figure to answer the question :

-In the figure above,the factor responsible for the decline in the interest rate is
A)a decline the price level.
B)a decline in income.
C)an increase in the money supply.
D)a decline in the expected inflation rate.

Accepted Answer

An increase in the money supply typically leads to a decline in interest rates because more money available means banks can lend more easily, reducing the cost of borrowing.

Question 11

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.
A)larger;fast
B)larger;slow
C)smaller;slow
D)smaller;fast

Accepted Answer

The liquidity effect suggests that an increase in the money supply will initially lower interest rates. If the liquidity effect is larger than other effects (such as the income and price expectations effects) and there is slow adjustment of expected inflation, interest rates will fall immediately. Fast adjustment of expected inflation would counteract the liquidity effect by increasing interest rates in anticipation of inflation.

Question 12

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the
A)interest rate will fall.
B)interest rate will rise.
C)interest rate will fall immediately below the initial level when the money supply grows.
D)interest rate will rise immediately above the initial level when the money supply grows.

Accepted Answer

The answer of If the liquidity effect is smaller than...

Question 13

Of the four effects on interest rates from an increase in the money supply,the initial effect is,generally,the
A)income effect.
B)liquidity effect.
C)price level effect.
D)expected inflation effect.

Accepted Answer

The initial effect of an increase in the money supply is the liquidity effect. This refers to the increase in the supply of money that leads to a fall in interest rates due to an excess supply of money. The income effect refers to the increase in income that occurs as a result of changes in interest rates, the price level effect refers to the impact of changes in the general price level on interest rates, and the expected inflation effect refers to the impact of changes in inflation expectations on interest rates. However, these effects typically occur after the initial liquidity effect has taken place.

Question 14

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

Accepted Answer

The answer of Using the liquidity preference framework,show what happens...

Question 15

In the market for money,when the price level falls,the ________ curve for nominal money ________,and interest rates ________,everything else held constant.
A)demand;decreases;fall
B)demand;increases;rise
C)supply;increases;rise
D)supply;decreases;fall

Accepted Answer

The answer of In the market for money,when the price...

Question 16

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is slow,then the
A)interest rate will fall.
B)interest rate will rise.
C)interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth.
D)interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth.

Accepted Answer

If the liquidity effect is small, it means that changes in the money supply will have a smaller impact on interest rates. However, if the adjustment to expected inflation is slow, it will eventually catch up, causing interest rates to initially fall but eventually climb above the initial level in response to an increase in money growth.

Question 17

If the Fed wants to permanently lower interest rates,then it should raise the rate of money growth if
A)there is fast adjustment of expected inflation.
B)there is slow adjustment of expected inflation.
C)the liquidity effect is smaller than the expected inflation effect.
D)the liquidity effect is larger than the other effects.

Accepted Answer

When the Fed wants to permanently lower interest rates, raising the rate of money growth can be effective if the liquidity effect (the immediate impact of an increase in the money supply leading to lower interest rates) is larger than the other effects, such as the expected inflation effect. This is because the initial decrease in interest rates due to the liquidity effect can outweigh the potential increase in interest rates that might come from higher expected inflation, at least in the short term. Over time, as expectations adjust, the lower interest rates can become more entrenched.

Question 18

________ in the money supply in the market for money creates excess ________ money,causing interest rates to ________,everything else held constant.
A)A decrease;demand for;rise
B)An increase;demand for;fall
C)An increase;supply of;rise
D)A decrease;supply of;fall

Accepted Answer

A decrease in the money supply creates excess demand for money, causing interest rates to rise as people are willing to pay more to borrow money.

Question 19

Use the following figure to answer the question :

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by
A)a decrease in money growth.
B)a decline in the expected price level.
C)an increase in income.
D)an increase in the expected price level.

Accepted Answer

A decrease in the expected price level (deflation) would lead to a decrease in the nominal interest rate, as lenders and borrowers would require lower compensation for the decreased inflation risk. A decrease in money growth (monetary contraction) would potentially lead to an increase in nominal interest rates, as the reduced money supply would make it more expensive to borrow. An increase in income would potentially lead to an increase in nominal interest rates, as the increased demand for loans would drive up interest rates. An increase in the expected price level (inflation) would potentially lead to an increase in nominal interest rates, as lenders and borrowers would require higher compensation for the increased inflation risk.

Question 20

It is possible that when the money supply rises,interest rates may ________ if the ________ effect is more than offset by changes in income,the price level,and expected inflation.
A)fall;liquidity
B)fall;risk
C)rise;liquidity
D)rise;risk

Accepted Answer

When the money supply increases, the liquidity effect typically leads to lower interest rates. However, if the increase in money supply also leads to higher income, price levels, and expected inflation, these factors can increase demand for money and push interest rates up, offsetting the liquidity effect.

Quiz 5: The Behavior of Interest Rates

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.

In the liquidity preference framework,a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs

Of the four effects on interest rates from an increase in the money supply,the one that works in the opposite direction of the other three is the

Use the following figure to answer the question : -In the figure above,the decrease in the interest rate from i1 to i2 can be explained by

In the market for money,when the Fed the money stock,the money supply curve shifts to the and the interest rate ,everything else held constant.

When the growth rate of the money supply increases,interest rates end up being permanently lower if

Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?

in the money supply in the market for money creates excess demand for ,causing interest rates to ,everything else held constant.

Use the following figure to answer the question : -In the figure above,one factor NOT responsible for the decline in the demand for money is

Use the following figure to answer the question : -In the figure above,the factor responsible for the decline in the interest rate is

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is than the other money supply effects and there is adjustment of expected inflation.

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the

Of the four effects on interest rates from an increase in the money supply,the initial effect is,generally,the

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

In the market for money,when the price level falls,the curve for nominal money ,and interest rates ,everything else held constant.

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is slow,then the

If the Fed wants to permanently lower interest rates,then it should raise the rate of money growth if

in the money supply in the market for money creates excess money,causing interest rates to ,everything else held constant.

Use the following figure to answer the question : -In the figure above,the decrease in the interest rate from i1 to i2 can be explained by

It is possible that when the money supply rises,interest rates may if the effect is more than offset by changes in income,the price level,and expected inflation.