Question 1

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.
A) greater; fall; increase
B) less; rise; decrease
C) greater; rise; increase
D) less; fall; increase

Accepted Answer

If the nominal interest rate is above the equilibrium value, it means that the interest rate is too high and people are not willing to borrow as much money. This leads to a situation where the quantity demanded of money is less than the quantity supplied of money. Because of this excess supply of money, bond prices will rise and the yield on the bonds will fall. This, in turn, will cause the nominal interest rate to fall as well. So, when the nominal interest rate is above the equilibrium value, we can expect the quantity demanded of money to be less than the quantity supplied of money, bond prices to rise, and the nominal interest rate to fall.

Question 2

Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve:
A) shifts to the right.
B) shifts to the left.
C) slopes upward.
D) slopes downward.

Accepted Answer

The money demand curve is a typical demand curve insofar as it is downward-sloping. The money demand curve shows the inverse relationship between nominal interest rates and the quantity of money demanded.

Question 3

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.
A) greater; fall; increase
B) greater; fall; decrease
C) greater; rise; increase
D) less; fall; increase

Accepted Answer

When the nominal interest rate is below the equilibrium, the quantity demanded of money is greater than the quantity supplied by the Fed. In this case, bond prices fall as bonds are sold to raise cash, which drives the nominal interest rate up.

Question 4

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ______ of bonds that ______ the money supply.
A) sale; increases
B) sale; decreases
C) purchase; decreases
D) purchase; increases

Accepted Answer

To reduce nominal interest rates, the Fed must increase the money supply. This can be accomplished by purchasing bonds on the open market, which increases the amount of money in circulation and ultimately reduces interest rates. Therefore, the correct choice is purchasing bonds (option D) that increases the money supply.

Question 5

The money demand curve will shift to the left if:
A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) ATM machines are introduced.
D) the price level increases.

Accepted Answer

If new and convenient ways to make transactions or access money emerge, people desire to hold less money at all nominal interest rates. The money demand curve shifts to the left. Note that since the nominal interest rate is measured on the vertical axis, changes in nominal interest rates cannot shift the curve, but would be seen as a movement along the curve.

Question 6

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.
A) potential output
B) the nominal interest rate
C) government purchases
D) the budget deficit

Accepted Answer

The nominal interest rate is connected to the money supply as the Fed can control the supply of money through its monetary policy tools, which in turn can affect the nominal interest rate. As the money supply increases, interest rates may decrease and vice versa. Therefore, any value of the money supply chosen by the Fed would imply a specific value for the nominal interest rate. The other options, potential output, government purchases, and the budget deficit, are not directly affected by changes in the money supply.

Question 7

Any value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.
A) potential output
B) the money supply
C) government purchases
D) the budget deficit

Accepted Answer

The nominal interest rate chosen by the Federal Reserve affects the cost of borrowing and lending money and thus influences the demand and supply of money in the economy. The money supply refers to the total amount of money available in the economy, which is influenced by the Federal Reserve's monetary policy decisions, including changes in the nominal interest rate. Therefore, the correct answer is B. Potential output, government purchases, and the budget deficit are not directly affected by changes in the nominal interest rate.

Question 8

During the Christmas shopping season, the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will ____.
A) increase
B) decrease
C) remain constant
D) equal the real interest rates

Accepted Answer

If the Fed takes no actions to offset the increase in money demand, then the money supply will remain constant while demand increases, leading to a shortage of money. This shortage will cause banks to raise their interest rates to attract more funds, resulting in an increase in nominal interest rates.

Question 9

When Argentines increase their savings in U.S. dollars, the U.S. money:
A) supply curve shifts left.
B) supply curve shifts right.
C) demand curve shifts right.
D) demand curve shifts left.

Accepted Answer

When Argentines increase their savings in U.S. dollars, they desire more dollars at all nominal interest rates. The U.S. money demand curve shifts to the right.

Question 10

The money demand curve will shift to the left if:
A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) price level increases.
D) the price level decreases.

Accepted Answer

According to the quantity theory of money, the demand for money is directly related to the level of prices in the economy. If the price level decreases, people would need less money to carry out their transactions, and therefore the demand for money would decrease, shifting the money demand curve to the left. Factors A and B are incorrect because they relate to changes in nominal interest rates, which would affect the position on the same demand curve rather than shifting it.

Question 11

Because the Fed determines the money supply, the:
A) money supply curve is downward sloping.
B) money supply curve is upward sloping.
C) money supply curve is vertical.
D) money supply curve is horizontal.

Accepted Answer

The Fed determines the money supply, meaning it fixes the amount of money in the economy. Therefore, the money supply curve is vertical, indicating that changes in the interest rate will not affect the quantity of money supplied.

Question 12

The money demand curve relates ______ to the ________.
A) the aggregate quantity of money demanded; aggregate demand
B) aggregate demand; nominal interest rate
C) the aggregate quantity of money demanded; price level
D) the aggregate quantity of money demanded; nominal interest rate

Accepted Answer

The money demand curve shows the relationship between the aggregate quantity of money demanded and the nominal interest rate. As the interest rate increases, individuals and firms will demand less money, and as the interest rate decreases, they will demand more money. It is not related to the price level or aggregate demand.

Question 13

If the quantity supplied of money exceeds the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.
A) buy; rise; fall
B) sell; fall; fall
C) sell; rise; fall
D) buy; fall; rise

Accepted Answer

When the quantity supplied of money exceeds the quantity demanded, people buy bonds to shed cash. This raises bond prices and causes nominal interest rates to fall.

Question 14

The money demand curve will shift to the left if:
A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) price level increases.
D) real income decreases.

Accepted Answer

A decrease in real income reduces the transactions demand for money, shifting the money demand curve to the left.

Question 15

If the quantity supplied of money is less than the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.
A) sell; fall; rise
B) sell; fall; fall
C) sell; rise; fall
D) buy; fall; rise

Accepted Answer

When the quantity supplied of money is less than the quantity demanded, people sell bonds to raise cash. This lowers bond prices and causes nominal interest rates to rise.

Question 16

The equilibrium quantity of money in circulation is determined by:
A) the interaction of money supply and money demand.
B) the nominal interest rate, real income, and the price level.
C) the Federal Reserve.
D) individuals, households, and businesses.

Accepted Answer

The answer of The equilibrium quantity of money in circulation...

Question 17

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. If the Fed took no actions to offset this increase in money demand, then nominal interest rates would _____.
A) increase
B) decrease
C) remain constant
D) equal the real interest rates

Accepted Answer

If the Fed took no actions to offset the increase in money demand, the increase in demand would result in a decrease in the supply of money. This decrease in money supply would cause nominal interest rates to increase.

Question 18

The money demand curve will shift to the right if:
A) the nominal interest rate increases.
B) real income increases.
C) ATM machines are introduced.
D) the price level decreases.

Accepted Answer

If real incomes increase, people desire to spend more money at all nominal interest rates. The money demand curve shifts to the right.

Question 19

The money demand curve will shift to the right if:
A) the nominal interest rate increases.
B) the nominal interest rate decreases.
C) the price level increases.
D) the price level decreases.

Accepted Answer

An increase in the price level will increase the demand for money as people need more money to transact in a higher-priced environment. This will shift the money demand curve to the right. Changes in nominal interest rates do not shift the money demand curve, but rather move along it. An increase in nominal interest rates will decrease money demand (and vice versa) while a change in the price level will shift the entire curve.

Question 20

Which of the following would be expected to decrease the demand for money in the U.S.?
A) Grocery stores begin to accept credit cards in payment.
B) The economy enters a boom period.
C) Political instability increases dramatically in developing nations.
D) Households fear increasing computer glitches will severely limit their ability to use ATMs.

Accepted Answer

When alternate forms of payment emerge, like credit cards, the average person holds less money.

Quiz 12: Short-Term Economics Fluctuations: An Introduction

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is __ than the quantity supplied of money, bond prices will , and the nominal interest rate will .

Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve:

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is __ than the quantity supplied of money, bond prices will , and the nominal interest rate will .

If the Fed wishes to reduce nominal interest rates, it must engage in an open market of bonds that the money supply.

The money demand curve will shift to the left if:

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.

Any value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.

During the Christmas shopping season, the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will ____.

When Argentines increase their savings in U.S. dollars, the U.S. money:

The money demand curve will shift to the left if:

Because the Fed determines the money supply, the:

The money demand curve relates to the __.

If the quantity supplied of money exceeds the quantity demanded of money, people will bonds which will cause bond prices to and the nominal interest rate to __ until the quantity demanded and quantity supplied of money are equal.

The money demand curve will shift to the left if:

If the quantity supplied of money is less than the quantity demanded of money, people will bonds which will cause bond prices to and the nominal interest rate to __ until the quantity demanded and quantity supplied of money are equal.

The equilibrium quantity of money in circulation is determined by:

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. If the Fed took no actions to offset this increase in money demand, then nominal interest rates would _____.

The money demand curve will shift to the right if:

The money demand curve will shift to the right if:

Which of the following would be expected to decrease the demand for money in the U.S.?