Question 1

As the interest rate decreases,the quantity of money people will hold:
A) decreases.
B) increases.
C) stays the same.
D) rises and then falls.
E) falls and then rises.

Accepted Answer

As the interest rate decreases, it becomes less profitable to save money and more attractive to spend it, invest it, or lend it out. Therefore, people will tend to hold less money and increase their spending and investing, leading to an increase in the quantity of money they hold.

Question 2

Which of the following statements is true?
A) The speculative demand for money at possible interest rates gives the demand for money curve its upward slope.
B) There is an inverse relationship between the quantity of money demanded and the interest rate.
C) According to the quantity theory of money, any change in the money supply will have no effect on the price level.
D) All of the above.

Accepted Answer

This statement is true according to the theory of money demand. As the interest rate increases, the opportunity cost of holding money increases, leading to a decrease in the quantity of money demanded. The other statements (A and C) are not correct. The speculative demand for money is only one of the motives for holding money, and it does not give the demand for money curve its upward slope. The quantity theory of money suggests that changes in the money supply will lead to changes in the price level, ceteris paribus.

Question 3

If the Fed expands the money supply by $1 trillion,what will happen in the money market?
A) The equilibrium interest rate will rise, and less money will be exchanged in equilibrium.
B) The equilibrium interest rate will fall, and more money will exchanged in equilibrium.
C) The equilibrium interest rate will not change.
D) None of the above.

Accepted Answer

When the Fed expands the money supply, the supply of money shifts to the right, resulting in a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of money exchanged. This is because there is more money available to lend, leading to increased competition among lenders, driving down the interest rate.

Question 4

If the Fed wants to raise interest rates,then it can use its open market operations to:
A) increase the money supply.
B) decrease the money supply.
C) increase money demand.
D) decrease money demand.

Accepted Answer

If the Fed wants to raise interest rates, it needs to decrease the money supply. This can be done through open market operations by selling government securities to banks and investors, which decreases their reserves and therefore reduces the amount of money circulating in the economy. This decrease in money supply leads to an increase in the demand for money, which in turn leads to higher interest rates.

Question 5

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion.If the Fed raises the discount rate,which of the following is most likely to be the new money market equilibrium?
A) An interest rate of 6 percent and a quantity of $1.5 trillion.
B) An interest rate of 5 percent and a quantity of $2 trillion.
C) An interest rate of 4 percent and a quantity of $2.5 trillion.
D) None of the above.

Accepted Answer

The answer of Suppose that the current money market equilibrium...

Question 6

If at the prevailing interest rate the quantity of money demanded is $2 trillion,and the supply of money is $1.5 trillion,then which of the following is true?
A) There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market.
B) There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market.
C) There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.
D) There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.

Accepted Answer

The quantity of money demanded at the prevailing interest rate is $2 trillion, which is greater than the supply of money at $1.5 trillion. This means that there is a shortage of money in the economy. To achieve an equilibrium in the money market, interest rates must rise in order to encourage individuals to save more and borrow less, thus reducing the demand for money and increasing the supply of money until it reaches the desired level.

Question 7

The demand for money curve shows that there is an inverse relationship between the quantity of money demanded and the:
A) quantity of money supplied.
B) gross domestic product (GDP).
C) price level.
D) interest rate.

Accepted Answer

The demand for money curve shows that as the interest rate increases, the quantity of money demanded decreases. Therefore, there is an inverse relationship between the quantity of money demanded and the interest rate.

Question 8

In Keynes's view,an excess quantity of money supplied causes people to:
A) sell bonds and the interest rate rises.
B) buy bonds and the interest rate falls.
C) buy bonds and the interest rate rises.
D) increase speculative balances.

Accepted Answer

Keynes believed that an excess supply of money would lead people to buy bonds, which increases their price and, as a result, lowers the interest rate. This is because the interest rate and the price of bonds move inversely to each other.

Question 9

When the interest rate falls,
A) the opportunity cost of holding money rises.
B) people shift out of holding interest-yielding bonds into holding money.
C) the quantity of money people will hold decreases.
D) investment spending decreases.
E) real GDP will decrease.

Accepted Answer

When interest rates fall, the return on interest-yielding investments such as bonds decreases, leading people to shift their funds out of those investments and into holding money instead. This increases the demand for money, which leads to a decrease in interest rates.

Question 10

Suppose that the current money market equilibrium has an interest rate of 5 percent and a quantity of $2 trillion.Suppose that at a 6 percent interest rate,the quantity of money demanded is $1.5 trillion,while at a 4 percent interest rate it is $2.5 trillion.If the Fed makes an open-market purchase of $50 billion,and the money multiplier is 10,what will be the new money market equilibrium?
A) An interest rate of 6 percent and a quantity of $1.5 trillion.
B) An interest rate of 5 percent and a quantity of $2 trillion.
C) An interest rate of 4 percent and a quantity of $2.5 trillion.
D) None of the above.

Accepted Answer

The answer of Suppose that the current money market equilibrium...

Question 11

Assume a fixed demand for money curve and the Fed increases the money supply.The result is a temporary:
A) excess quantity of money demanded.
B) excess quantity of money supplied.
C) new equilibrium interest rate.
D) decrease in the demand for loans.

Accepted Answer

When the Fed increases the money supply, it leads to an excess quantity of money supplied in the short run. This is because the demand for money is fixed and does not change immediately. As a result, there is an imbalance between the quantity of money demanded and the quantity supplied, leading to a temporary excess quantity of money supplied. This can lead to lower interest rates and stimulate borrowing and spending in the short run.

Question 12

The three functions of money are medium of exchange,
A) measure of value, and standard of value.
B) measure of value, and store of value.
C) standard of value, and store of value
D) medium of value, and store of value.
E) measure of value, and deferred value.

Accepted Answer

The three functions of money are medium of exchange, measure of value, and store of value. Therefore, the best choice is B, as it includes the correct functions. Choice A is incorrect because it repeats standard of value twice. Choice C is incorrect because it only includes two of the three functions. Choice D is incorrect because it includes medium of value, which is not a recognized function of money. Choice E is incorrect because it includes deferred value, which is not a recognized function of money.

Question 13

Assume the Fed decreases the money supply and the demand for money curve is fixed.In response,people will:
A) sell bonds, thus driving up the interest rate.
B) buy bonds, thus driving down the interest rate.
C) buy bonds, thus driving up the interest rate.
D) sell bonds, thus driving down the interest rate.

Accepted Answer

When the Fed decreases the money supply, it makes it more expensive to obtain credit. This increases the demand for money and drive up the interest rate. When the interest rate goes up, people tend to sell bonds as they can get a higher return for their investment, which in turn drives up the interest rate further.

Question 14

In Keynes's view,an excess quantity of money demanded causes people to:
A) sell bonds and the interest rate rises.
B) buy bonds and the interest rate falls.
C) buy bonds and the interest rate rises.
D) increase speculative balances.

Accepted Answer

In Keynes's view, an excess quantity of money demanded (or a liquidity preference) leads people to sell bonds, which increases the supply of bonds in the market, lowering their price and thus raising the interest rate.

Question 15

Keynesians identify three principal motives for demanding money.They are the:
A) transactions demand, precautionary demand, and liquidity motive.
B) transactions demand, precautionary demand, and convertibility motive.
C) transactions demand, speculative demand, and volatility motive.
D) transactions demand, speculative demand, and liquidity motive.
E) transactions demand, speculative demand, and precautionary demand.

Accepted Answer

The answer of Keynesians identify three principal motives for demanding...

Question 16

Assume a fixed demand for money curve and the Fed decreases the money supply.In response,people will:
A) sell bonds, thus driving up the interest rate.
B) sell bonds, thus driving down the interest rate.
C) buy bonds, thus driving up the interest rate.
D) buy bonds, thus driving down the interest rate.

Accepted Answer

When the Fed decreases the money supply, the supply of bonds remains the same but the demand for bonds increases as people try to obtain more money to meet their demand for money. This increased demand for bonds leads to an increase in bond prices and a decrease in interest rates. As a result, people who hold bonds will want to sell them to take advantage of the higher prices, and the increased supply of bonds will drive down bond prices even further and raise interest rates.

Question 17

Which of the following falls when bond prices rise?
A) Stock prices.
B) Interest rates.
C) Money demand.
D) Money supply.

Accepted Answer

As bond prices rise, interest rates fall. This is because there is an inverse relationship between bond prices and interest rates - as bond prices rise, the yield on those bonds falls, causing interest rates to fall as well.

Question 18

Assume a fixed demand for money curve and the Fed increases the money supply.In response,people will:
A) sell bonds, thus driving up the interest rate.
B) sell bonds, thus driving down the interest rate.
C) buy bonds, thus driving up the interest rate.
D) buy bonds, thus driving down the interest rate.

Accepted Answer

When the Fed increases the money supply, individuals will have more money to spend. This increased spending will lead to an increase in demand for goods and services, which in turn will lead to an increase in demand for funds to finance these purchases. Since the demand for funds has increased, individuals will need to buy more bonds to finance this increased demand, which will drive up the price of bonds and in turn drive down the interest rate. Therefore, people will buy bonds, thus driving down the interest rate. Choice D is correct.

Question 19

If people attempt to sell bonds because of excess money demand,then the interest rate will:
A) rise.
B) fall.
C) remain unchanged
D) react unpredictably.

Accepted Answer

When people attempt to sell bonds because of excess money demand, the supply of bonds increases while the demand for bonds decreases. This leads to a surplus of bonds in the market, which in turn causes the price of bonds to fall. When bond prices fall, the interest rates rise to compensate for the lower price. Therefore, the correct answer is A, the interest rate will rise.

Question 20

People react to an excess supply of money by:
A) selling bonds, thus driving up the interest rate.
B) selling bonds, thus driving down the interest rate.
C) buying bonds, thus driving up the interest rate.
D) buying bonds, thus driving down the interest rate.

Accepted Answer

When there is an excess supply of money, people tend to buy bonds as a way to invest and earn interest. This increased demand for bonds drives up bond prices and, in turn, drives down interest rates. Therefore, the correct choice is D: buying bonds, thus driving down the interest rate.

Quiz 20: Monetary Policy

As the interest rate decreases,the quantity of money people will hold:

Which of the following statements is true?

If the Fed expands the money supply by $1 trillion,what will happen in the money market?

If the Fed wants to raise interest rates,then it can use its open market operations to:

Suppose that the current money market equilibrium features an interest rate of 5 percent and a quantity of $2 trillion.If the Fed raises the discount rate,which of the following is most likely to be the new money market equilibrium?

If at the prevailing interest rate the quantity of money demanded is $2 trillion,and the supply of money is $1.5 trillion,then which of the following is true?

The demand for money curve shows that there is an inverse relationship between the quantity of money demanded and the:

In Keynes's view,an excess quantity of money supplied causes people to:

When the interest rate falls,

Assume a fixed demand for money curve and the Fed increases the money supply.The result is a temporary:

The three functions of money are medium of exchange,

Assume the Fed decreases the money supply and the demand for money curve is fixed.In response,people will:

In Keynes's view,an excess quantity of money demanded causes people to:

Keynesians identify three principal motives for demanding money.They are the:

Assume a fixed demand for money curve and the Fed decreases the money supply.In response,people will:

Which of the following falls when bond prices rise?

Assume a fixed demand for money curve and the Fed increases the money supply.In response,people will:

If people attempt to sell bonds because of excess money demand,then the interest rate will:

People react to an excess supply of money by: