Deck 14: The Money Market and Monetary Policy

Question 1

The opportunity cost of holding money is

A) the dollar cost necessary to change other assets into money
B) the time cost of accessing funds
C) the value of the goods and services a person is able to obtain with the money
D) the interest a person could have earned by holding other forms of wealth instead
E) zero,because opportunity costs only apply to real assets,goods and services.

Answer 1

the interest a person could have earned by holding other forms of wealth instead

Question 2

An increase in the interest rate reduces the opportunity cost of holding money.

Answer 2

False

Question 3

A decrease in the interest rate shifts the money demand curve to the right.

Answer 3

False

Question 4

An individual's quantity of money demanded

A) refers to how much money the individual would like to have
B) refers to the amount of money an individual needs to maintain her desired standard of living
C) refers to her wealth constraint
D) refers to the amount of her wealth that an individual chooses to hold in the form of money
E) is virtually unlimited.

Question 5

The amount of wealth that an individual wishes to hold as money is determined by

A) the price level
B) the price level and real income
C) real income
D) real income and the interest rate
E) the price level,real income,and the interest rate

Question 6

Which of the following is a stock variable?

A) Saving
B) Consumption
C) Income
D) Investment
E) Money.

Question 7

Which of the following would be most likely to increase the quantity of money demanded?

A) A decrease in real income
B) An increase in real income
C) A decrease in the interest rate
D) An increase in the cost of converting other assets into money
E) An increase in the price level

Question 8

Which of the following is the opportunity cost of money?

A) The use of money as a means of payment
B) The trouble of having to get money out of the bank
C) The interest forgone by holding money
D) The ability to purchase things at a moment's notice
E) Commissions paid to brokers

Question 9

When economists speak of the demand for money,they refer to the amount of money people would like to hold

A) given that it can only be printed slowly
B) in the best of all possible worlds
C) in their bank accounts rather than their wallets
D) at each interest rate
E) rather than spend.

Question 10

Which of the following determines how much money an individual will decide to hold?

A) Investment spending
B) Income taxes
C) The price level
D) The supply of money
E) Real GDP

Question 11

Which of the following will lead to an increase in the quantity of money demanded?

A) A decrease in the overall level of wealth in the economy
B) A decrease in the price level
C) A decrease in nominal income
D) An increase in real income
E) A decrease in real income

Question 12

The demand for curve for money

A) shows the amount of money people actually hold
B) shows the amount of money people would like to hold,given the constraints they face
C) shifts if the interest rate changes
D) is independent of the price level
E) changes whenever the Fed changes the money supply.

Question 13

A household's quantity of money demanded is defined as

A) the amount of income that the household chooses to hold in the form of money,at each possible interest rate
B) the amount of wealth that the household chooses to hold as money,rather than as other assets
C) the household's desire to have greater financial wealth
D) the percentage of each dollar of income that the household wishes to spend
E) the total amount the household decides to hold in cash,bonds,and other assets,at each possible interest rate.

Question 14

An increase in the interest rate shifts the money demand curve to the right.

Question 15

An individual would be most likely to increase the amount of money he wants to hold if

A) the price level declines
B) the price level declines and the interest rate increases
C) his real income increases
D) the interest rate increases
E) the interest rate and his real income decrease

Question 16

A decrease in the interest rate reduces the opportunity cost of holding money.

Question 17

An individual's wealth constraint is determined by

A) the individual's level of education
B) the facts that wealth is given and so she must give up one kind of wealth in order to acquire another
C) overall conditions in the economy
D) the amount of wealth the individual chooses to hold in the form of money
E) the value of corporate stock.

Question 18

If income changes,that leads to a movement along the money demand curve.

Question 19

Which of the following would be most likely to increase the demand for money?

A) An increase in the price level
B) A decrease in real income
C) An increase in the interest rate
D) A decrease in the cost of converting other assets into money
E) A decrease in the price level

Question 20

The demand for money

A) is the same as the demand for bonds
B) is the same as the supply of bonds
C) increases whenever the price level falls
D) reflects the constraints that people face
E) shows the people always demand as much money as possible

Question 21

The money supply curve is vertical because

A) real income does not influence the quantity of money supplied
B) the price level does not influence the level of spending
C) only the interest rate influences the quantity of money supplied
D) the Federal Reserve sets the money supply
E) nominal income does not influence the quantity of money supplied

Question 22

Refer to Figure 14-1.If the economy is currently at point X,a decrease in the interest rate will

A) increase the quantity of money demanded (moving the economy toward point A)
B) decrease the quantity of money demanded (moving the economy toward point B)
C) increase money demand (shifting the curve toward curve C)
D) decrease money demand (shifting the curve toward curve D)
E) leave the economy at point X

Question 23

If the price level increases,the money demand curve will

A) shift leftward
B) become steeper
C) remain in the same position;however,there will be movement upward along the curve
D) shift rightward
E) remain in the same position;however,there will be movement downward along the curve

Question 24

Which of the following would lead to a rightward movement along a stationary money demand curve?

A) A decrease in the interest rate
B) A decrease in the price level
C) An increase in the interest rate
D) An increase in the price level
E) An increase in real income

Question 25

The money demand curve indicates the total quantity of money demanded in the economy at each

A) price level
B) level of GDP
C) quantity of money supplied
D) level of income
E) interest rate

Question 26

The money supply is

A) positively related to the interest rate
B) negatively related to the interest rate
C) positively related to income
D) negatively related to income
E) set by the Fed and therefore independent of the interest rate and income

Question 27

If real income increases,

A) there will be a rightward movement along a stationary money demand curve
B) there will be a leftward movement along a stationary money demand curve
C) the demand for money curve will shift rightward
D) the demand for money curve will shift leftward
E) there will be no movement of the demand curve for money and no movement along it

Question 28

If there is a decrease in the price level,

A) there will be a rightward movement along a stationary money demand curve
B) there will be a leftward movement along a stationary money demand curve
C) the demand curve for money will shift rightward
D) the demand curve for money will shift leftward
E) there will be no movement of the demand curve for money and no movement along it

Question 29

If the interest rate decreases,there will be

A) a movement leftward from one point on the money demand curve to another point on the same curve
B) no change in the quantity of money demanded
C) a leftward shift of the entire money demand curve caused by a demand shock
D) a rightward shift of the entire money demand curve
E) a movement rightward from one point on the money demand curve to another point on the same curve

Question 30

Open market sales of bonds by the Federal Reserve drain reserves from the banking system and shift

A) the allocation of wealth between bonds and stocks
B) the economy toward a trough in the business cycle
C) the money supply curve leftward
D) reserves to nonmember banks
E) the demand for money curve leftward

Question 31

The classical model's theory of the interest rate does not apply in the short run.

Question 32

If there is an increase in the interest rate,

A) there will be a rightward movement along a stationary money demand curve
B) there will be a leftward movement along a stationary money demand curve
C) the demand curve for money will shift rightward
D) the demand curve for money will shift leftward
E) there will be no movement of the demand curve for money and no movement along it

Question 33

The money demand curve is

A) downward sloping
B) upward sloping
C) horizontal
D) vertical
E) has an inverted V-shape

Question 34

Refer to Figure 14-2.If the interest rate is 8 percent,

A) there is an excess supply of money equal to $100 billion
B) there is an excess demand for money
C) there is an excess supply of money equal to $400 billion
D) the Fed will decrease the money supply
E) the interest rate will tend to rise

Question 35

The money supply curve is

A) upward sloping
B) downward sloping
C) vertical
D) horizontal
E) parallel to the money demand curve

Question 36

An open market purchase of bonds by the Fed

A) drains reserves from the banking system and decreases the money supply
B) injects reserves into the banking system and increases money demand
C) injects reserves into the banking system and increases the money supply
D) drains reserves from the banking system and increases the money supply
E) injects reserves into the banking system and decreases the money supply

Question 37

Where is the interest rate determined in the classical model?

A) In the goods market
B) In the loanable funds market
C) By the federal government
D) By the Fed
E) Where aggregate expenditure equals GDP.

Question 38

The money market is in equilibrium when there is no excess supply of or excess demand for bonds.

Question 39

The economy's money supply curve is vertical.

Question 40

Refer to Figure 14-1.If the economy is currently at point X,an increase in the interest rate will

A) increase the quantity of money demanded (moving the economy toward point A)
B) decrease the quantity of money demanded (moving the economy toward point B)
C) increase money demand (shifting the curve toward curve C)
D) decrease money demand (shifting the curve toward curve D)
E) leave the economy at point X

Question 41

An excess demand for money exists if the interest rate is below the equilibrium rate.

Question 42

If the interest rate is above its equilibrium value,the price of

A) bonds will fall
B) real estate will rise
C) bonds will rise
D) stocks will fall because of fluctuations in the bond market
E) money will rise

Question 43

If Chris pays $500 for a bond that will return $750 in one year,what is the interest rate?

A) 50 percent
B) 10 percent
C) 25 percent
D) 250 percent
E) 33 percent

Question 44

An excess supply of money in the economy implies an excess demand for

A) stocks
B) mortgages
C) consumer nondurables
D) consumer durables
E) bonds

Question 45

Equilibrium in the money market means that the quantity of money people are holding equals

A) their entire wealth
B) their entire income
C) the quantity of money that they want to hold
D) the money supply
E) the value of bonds in their financial portfolios

Question 46

Refer to Figure 14-4.If the interest rate is currently 8 percent,we would expect the

A) interest rate to rise to 10 percent
B) interest rate to rise to 12 percent
C) interest rate to fall to 6 percent
D) quantity of money held to decrease to $500 billion
E) money supply to increase to $700 billion

Question 47

The equilibrium short-run interest rate is determined at the intersection of the demand and supply curves in the market for

A) labor
B) money
C) capital goods
D) mortgage funds
E) corporate bonds

Question 48

If there is an excess supply of money in the economy,

A) there is also an excess demand for money
B) there is also an excess demand for bonds
C) there is also an excess supply of bonds
D) the interest rate will rise
E) the Fed must intervene to restore equilibrium

Question 49

People's decision about whether to hold money or bonds can be influenced by the interest rate.

Question 50

If the price of bonds rises,

A) the Fed will decrease the money supply
B) the Fed will increase the money supply
C) the interest rate will rise
D) the interest rate will fall
E) inflation must be accelerating

Question 51

If Pat pays $500 for a one-year bond that carries an interest rate of 10 percent per year,how much will she be repaid at the end of the year?

A) $600
B) $510
C) $620
D) $550
E) $500

Question 52

If there is an excess supply of money,there is an excess

A) demand for bonds and the price of bonds will decrease
B) supply of bonds and the price of bonds will decrease
C) supply of bonds but the price of bonds will not change
D) supply of bonds and the price of bonds will increase
E) demand for bonds and the price of bonds will increase

Question 53

Refer to Figure 14-2.If the interest rate is 4 percent,

A) there is an excess demand for money equal to $100 billion
B) there is an excess demand for money
C) there is an excess demand for money equal to $400 billion
D) the Fed will decrease the money supply
E) the interest rate will tend to rise

Question 54

Refer to Figure 14-3.What are the equilibrium interest rate and quantity of money?

A) 10 percent and $500 billion
B) 8 percent and $500 billion
C) 6 percent and $500 billion
D) 8 percent and $750 billion
E) 6 percent and $750 billion

Question 55

If the actual interest rate is below the equilibrium interest rate,the

A) Fed must intervene in financial markets to restore the interest rate to its equilibrium value
B) price of bonds will increase
C) price of bonds will decrease
D) money supply will increase until the interest rate rises
E) money supply will decrease until the interest rate rises

Question 56

Refer to Figure 14-4.If the interest rate is currently 12 percent,we would expect the

A) interest rate to fall to 10 percent
B) interest rate to remain at 12 percent
C) interest rate to fall to 6 percent
D) quantity of money held to decrease to $500 billion
E) money supply to increase to $700 billion

Question 57

If there is an excess supply of money in the money market,there must be an excess supply of bonds in the bond market.

Question 58

An increase in the demand for bonds will increase both the price of bonds and the quantity of bonds held.

Question 59

If the price of a bond increases,the interest rate (or rate of return on the bond)decreases.

Question 60

An excess supply of money implies an excess

A) supply of corporate stock
B) demand for bonds
C) supply of bonds
D) demand for corporate stock
E) demand for goods and services

Question 61

If the Fed wishes to increase the interest rate,it can do so by

A) selling bonds
B) buying bonds
C) increasing the money supply
D) setting a higher prime lending rate
E) encouraging the public to buy bonds

Question 62

Refer to Figure 14-5.If the Fed wishes to reduce the interest rate,it will

A) increase money demand
B) decrease money demand
C) increase the money supply
D) decrease the money supply
E) simply set a lower market interest rate

Question 63

The secondary market for bonds is

A) where new issues of bonds are purchased
B) of less importance to our economy than is the primary market
C) of less importance to our economy than the stock market
D) where bonds that were issued in previous periods are purchased
E) a key determinant of the money supply

Question 64

If the Fed conducted an open market sale of bonds,what would most likely happen in the bond market?

A) The excess demand for bonds would cause the price of bonds to fall.
B) The excess supply of bonds could cause the price of bonds to rise.
C) There would be no effect in the bond market.
D) The excess supply of bonds would cause the price of bonds to fall.
E) The excess demand for bonds would cause the price of bonds to rise.

Question 65

The money market achieves equilibrium when

A) individuals no longer want to spend their money
B) the price of bonds rises by an appropriate amount
C) buyers and sellers agree on a price for commodities
D) speculative balances are reduced to a minimum
E) individuals who hold bonds are satisfied with what they are holding

Question 66

If the Fed wants to lower the interest rate,it will

A) increase the money supply
B) decrease the money supply
C) increase money demand
D) decrease money demand
E) simply set a lower market interest rate

Question 67

If the demand for bonds increases,the

A) price and quantity of bonds in existence both increase
B) price of bonds increases,but the quantity of bonds in existence decreases
C) price of bonds increases,but the quantity of bonds in existence remains unchanged
D) interest rate and quantity of bonds in existence both increase
E) interest rate increases,but the quantity of bonds in existence remains unchanged

Question 68

If the price of bonds falls,the

A) demand for bonds will rise
B) supply of bonds will fall
C) supply of bonds will rise
D) interest rate will rise
E) interest rate will fall

Question 69

If the Fed wishes to raise the interest rate,it will

A) increase the money supply
B) decrease the money supply
C) increase money demand
D) decrease money demand
E) simply set a higher market interest rate

Question 70

If bond prices rise in the secondary market,

A) the interest rate rises in the secondary market
B) the interest rate rises in the primary market
C) this has no impact on the primary market
D) they fall in the primary market
E) they also rise in the primary market

Question 71

If the quantity of money demanded exceeds the quantity of money supplied at a given interest rate,what will happen to restore the market to equilibrium?

A) The public will try to buy bonds,the price of bonds will increase,and the interest rate will fall until equilibrium is attained where the money demand and supply curves intersect at the market interest rate.
B) The public will try to sell bonds,the price of bonds will decrease,and the interest rate will rise until equilibrium is attained where the money demand and supply curves intersect at the market interest rate.
C) The public will try to sell bonds,the price of bonds will increase,and the interest rate will fall until equilibrium is attained where the money demand and supply curves intersect.
D) The public will try to buy bonds,the price of bonds will increase,and the interest rate will rise until equilibrium is attained where the money demand and supply curves intersect.
E) The public will try to buy bonds,the price of bonds will decrease,and the interest rate will fall until equilibrium is attained where the money demand and supply curves intersect.

Question 72

If Johanna purchases a bond for $4,500 that promises to pay her $5,000 one year later,what is the interest rate on the bond?

A) 5.3 percent
B) 5.6 percent
C) 10.0 percent
D) 11.1 percent
E) 10.5 percent

Question 73

If Cathy has a bond that will pay $1,000 one year from now and its current price is $800,what is the current interest rate?

A) 10 percent
B) 25 percent
C) 20 percent
D) 200 percent
E) 2 percent

Question 74

Suppose that the equilibrium interest rate is 8 percent,but the actual interest rate is 5 percent.Very quickly,

A) bond prices fall
B) bond prices will rise
C) the interest rate will begin to fluctuate until bondholders reduce their demand for money
D) the primary bond market will start its adjustment process
E) the supply and demand for money will both increase

Question 75

To cause the interest rate to fall,the Fed can

A) decrease the money supply
B) stabilize the money supply to increase investor confidence
C) decrease the price of bonds
D) increase the money supply
E) increase the demand for money

Question 76

The secondary market for bonds is a market for

A) bonds that is smaller than the primary market
B) bonds that are not first-class
C) previously issued bonds
D) bonds that are not substitutes for bonds found in the primary market
E) newly issued bonds

Question 77

If the quantity of money demanded is less than the quantity supplied at a given interest rate,what will happen to restore the market to equilibrium?

A) The public will try to buy bonds,the price of bonds will increase,and the interest rate will fall until the equilibrium is attained where the money demand and supply curves intersect.
B) The public will try to sell bonds,the price of bonds will decrease,and the interest rate will rise until equilibrium is attained where the money demand and supply curves intersect.
C) The public will try to sell bonds,the price of bonds will increase,and the interest rate will fall until equilibrium is attained where the money demand and supply curves intersect.
D) The public will try to buy bonds,the price of bonds will increase,and the interest rate will rise until equilibrium is attained where the money demand and supply curves intersect.
E) The public will try to buy bonds,the price of bonds will decrease,and the interest rate will fall until equilibrium is attained where the money demand and supply curves intersect.

Question 78

Refer to Figure 14-5.If the Fed wishes to reduce the interest rate,it will

A) shift the demand curve to the right
B) shift the demand curve to the left
C) shift the supply curve of money to the right
D) shift the supply curve of money to the left
E) simply set a lower market interest rate

Question 79

References in the newspaper to the bond market are usually references to

A) the primary bond market
B) the commodities market
C) the secondary bond market
D) the stock market
E) the futures market

Question 80

The supply of bonds to the bond market

A) is positively related to the demand for stocks
B) is inversely related to the interest rate
C) is positively related to income
D) is positively related to the demand for bonds
E) only changes if new bonds are issued