Question 1

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 2

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Accepted Answer

The liquidity effect, which suggests that an increase in the money supply will initially lower interest rates, appears to dominate initially after T0, as indicated by the initial decrease in interest rates. This is followed by a slower adjustment of interest rates to changes in expected inflation, consistent with the description in choice A.

Question 3

-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 4

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 5

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Accepted Answer

The answer of 
-In the figure above,illustrates the effect of...

Question 6

Interest rates increased continuously during the 1970s.The most likely explanation is
A) banking failures that reduced the money supply.
B) a rise in the level of income.
C) the repeated bouts of recession and expansion.
D) increasing expected rates of inflation.

Accepted Answer

Increasing expected rates of inflation led to a rise in interest rates as lenders demanded higher returns to compensate for the loss in purchasing power of their money due to inflation.

Question 7

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 is because as the money supply increases, there is more money available to be lent out and this increases the liquidity in the financial system. This, in turn, leads to a decrease in interest rates as lenders compete for borrowers. The income effect, price level effect, and expected inflation effect may also come into play but they are not the initial effects of an increase in the money supply.

Question 8

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 smaller than the other effects, an increase in money growth will initially cause the interest rate to fall due to the income effect and the price-level effect dominating. However, the adjustment to expected inflation is slow, which means over time people will come to expect higher inflation, leading to an increase in nominal interest rates. Therefore, the interest rate will eventually climb above the initial level.

Question 9

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Accepted Answer

The liquidity effect, which suggests that an increase in the money supply will initially lower interest rates, appears to dominate initially after T0, as indicated by the initial decrease in interest rates. This is followed by a slower adjustment of interest rates to changes in expected inflation, consistent with the description in choice A.

Question 10

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the
A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

Accepted Answer

From the figure, we can see that an increased rate of money supply growth at T0 leads to an increase in expected inflation and a decrease in real interest rates. This is the liquidity effect. However, the increase in expected inflation also leads to an increase in nominal interest rates, which partially offsets the decrease in real interest rates. This is the expected inflation effect. The net effect is a decrease in real interest rates that is smaller than the liquidity effect alone. Additionally, interest rates adjust slowly to changes in expected inflation, as shown by the slow increase in nominal interest rates. Therefore, C is the best choice.

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

-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

The answer of 
-In the figure above,the decrease in the...

Question 13

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 14

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

The answer of It is possible that when the money...

Question 15

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 16

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 17

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 is the initial decrease in interest rates due to the increase in the money supply. If the liquidity effect is larger than the other effects, interest rates will remain permanently lower.

Question 18

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the
A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

Accepted Answer

From the figure, we can see that an increased rate of money supply growth at T0 leads to an increase in expected inflation and a decrease in real interest rates. This is the liquidity effect. However, the increase in expected inflation also leads to an increase in nominal interest rates, which partially offsets the decrease in real interest rates. This is the expected inflation effect. The net effect is a decrease in real interest rates that is smaller than the liquidity effect alone. Additionally, interest rates adjust slowly to changes in expected inflation, as shown by the slow increase in nominal interest rates. Therefore, C is the best choice.

Question 19

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the
A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

Accepted Answer

The answer of 
-In the figure above,illustrates the effect of...

Question 20

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

Friedman referred to the impact of increased money supply on interest rates as the liquidity effect. This is because an increase in the money supply leads to an increase in the supply of loanable funds, which in turn reduces interest rates, making money more easily accessible or "liquid" for borrowers.

Quiz 5: The Behavior of Interest Rates

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

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

-In the figure above,the factor responsible for the decline in the interest rate is

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

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

Interest rates increased continuously during the 1970s.The most likely explanation is

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

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

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

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.

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by

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

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.

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

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

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

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

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