Deck 15: Interest Rates and Monetary Policy

Question 1

Columns (1)and (2)indicate the transactions demand (D_t)for money and columns (1)and (3)show the asset demand (D_a)for money:
Refer to the above information.These data suggest that the amount of money demanded for transactions purposes:

A) varies directly with the interest rate.
B) varies inversely with the interest rate.
C) varies inversely with the GDP.
D) is independent of the interest rate.

Answer 1

is independent of the interest rate.

Question 2

The asset demand for money is most closely related to money functioning as a:

A) unit of account.
B) medium of exchange.
C) store of value.
D) measure of value.

Answer 2

store of value.

Question 3

The asset demand for money is downward sloping because:

A) the opportunity cost of holding money increases as the interest rate rises.
B) it is more attractive to hold money at high interest rates than at low interest rates.
C) bond prices rise as interest rates rise.
D) the opportunity cost of holding money declines as the interest rate rises.

Answer 3

the opportunity cost of holding money increases as the interest rate rises.

Question 4

The transactions demand for money is most closely related to money functioning as a:

A) unit of account.
B) medium of exchange.
C) store of value.
D) both store of value and unit of account.

Question 5

A decrease in the rate of interest would:

A) decrease the opportunity cost of holding money.
B) increase the transactions demand for money.
C) increase the asset demand for money.
D) decrease the price of bonds.

Question 6

Refer to the market for money diagram above.Curve D₁ represents the:

A) speculative demand for money.
B) transactions demand for money.
C) asset demand for money.
D) stock of money.

Question 7

On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively,the transactions demand for money can be represented by:

A) a line parallel to the horizontal axis.
B) a vertical line.
C) a downward sloping line or curve from left to right.
D) an upward sloping line or curve from left to right.

Question 8

On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively,the asset demand for money can be represented by:

A) a line parallel to the horizontal axis.
B) a vertical line.
C) a downward sloping line or curve from left to right.
D) an upward sloping line or curve from left to right.

Question 9

Columns (1)and (2)indicate the transactions demand (D_t)for money and columns (1)and (3)show the asset demand (D_a)for money:
Refer to the above information.These data suggest that the amount of money that society wishes to hold as an asset:

A) varies directly with the interest rate.
B) varies inversely with the interest rate.
C) varies inversely with the GDP.
D) is independent of the interest rate.

Question 10

If the dollars held for transactions purposes are,on the average,spent four times a year for final goods and services,then the quantity of money people will wish to hold for transactions is equal to:

A) four percent of nominal GDP.
B) 25 percent of nominal GDP.
C) nominal GDP multiplied times 4.
D) nominal GDP divided by 25.

Question 11

Which line in the above graph would best reflect the slope of the transactions demand for money curve?

A) line 1
B) line 2
C) line 3
D) line 4

Question 12

Which of the following is correct?

A) The asset demand for money is downward sloping because the opportunity cost of holding money declines as the interest rate rises.
B) The asset demand for money is downward sloping because the opportunity cost of holding money increases as the interest rate rises.
C) The transactions demand for money is downward sloping because the opportunity cost of holding money varies inversely with the interest rate.
D) The asset demand for money is downward sloping because bond prices and the interest rate are directly related.

Question 13

The opportunity cost of holding money:

A) is zero because money is not an economic resource.
B) varies inversely with the interest rate.
C) varies directly with the interest rate.
D) varies inversely with the level of economic activity.

Question 14

Which line in the above graph would best reflect the slope of the asset demand for money curve?

A) line 1
B) line 2
C) line 3
D) line 4

Question 15

Refer to the market for money diagram below.The downward slope of the money demand curve D_m can best be explained in terms of the:

A) transactions demand for money.
B) direct or positive relationship between bond prices and interest rates.
C) asset demand for money.
D) wealth or real-balances effect.

Question 16

A consumer holds money to meet spending needs.This would be an example of the:

A) use of money as a measure of value.
B) use of money as legal tender.
C) transactions demand for money.
D) asset demand for money.

Question 17

Refer to the above diagram.The asset demand for money is shown by:

A) D₁.
B) D₂.
C) D₃.
D) none of the above.

Question 18

The asset demand for money:

A) is unrelated to both the interest rate and the level of GDP.
B) varies inversely with the rate of interest.
C) varies inversely with the level of real GDP.
D) varies directly with the level of nominal GDP.

Question 19

The transactions demand for money will shift to the:

A) right when the interest rate increases.
B) left when the interest rate decreases.
C) right when aggregate income increases.
D) right when aggregate income decreases.

Question 20

Refer to the information below.The transactions demand for money in this market would graph as a:

A) vertical line.
B) horizontal line.
C) line sloping downward and to the right.
D) line sloping upward and to the right.

Question 21

Refer to the above information.All else equal,the transaction demand for money in this table would increase if:

A) nominal GDP increased.
B) the interest rate fell.
C) the supply of money increased.
D) the supply of money decreased.

Question 22

Which of the following statements is correct? Other things being equal:

A) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right.
B) a decline in the interest rate will shift the asset demand curve for money to the right,but leave the total money demand curve unchanged.
C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left.
D) inflation will shift the transactions demand curve for money to the right,but leave the total money demand curve unchanged.

Question 23

In which case would the quantity of money demanded by the public tend to increase by the greatest amount?

A) The interest rate increases and nominal GDP increases.
B) The interest rate increases and nominal GDP decreases.
C) The interest rate decreases and nominal GDP decreases.
D) The interest rate decreases and nominal GDP increases.

Question 24

If the money GDP is $600 billion and,on the average,each dollar is spent three times per year,then the amount of money demanded for transactions purposes:

A) will be $1800 billion.
B) will be $600 billion.
C) will be $200 billion.
D) cannot be determined from the information given.

Question 25

On a diagram wherein the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively,the total demand for money can be found by:

A) horizontally adding the transactions and the asset demand for money.
B) vertically subtracting the transactions demand from the asset demand for money.
C) horizontally subtracting the asset demand from the transactions demand for money.
D) vertically adding the transactions and the asset demand for money.

Question 26

Refer to the diagram below for the market for money.Other things equal,the money demand curve in the diagram would shift leftward if:

A) the asset demand for money increased.
B) the transactions demand for money increased.
C) nominal GDP decreased.
D) the overall price level rose.

Question 27

The total quantity of money demanded is determined by:

A) subtracting the asset demand for money from the transactions demand for money.
B) adding the transactions demand for money to the asset demand for money.
C) subtracting the transactions demand for money from nominal GDP.
D) adding the asset demand for money to nominal GDP.

Question 28

Refer to the above diagram for the market for money.If each dollar held for transactions purposes is spent four times per year on the average,we can infer that the:

A) real GDP is $800.
B) nominal GDP is $800.
C) money supply must be $800.
D) nominal GDP is $1,200.

Question 29

Refer to the above graph,in which D_t is the transactions demand for money,D_m is the total demand for money,and S_m is the supply of money.If the interest rate was 4 percent,the asset demand for money would be:

A) $125
B) $175
C) $200
D) $225

Question 30

Refer to the above information.The total demand for money curve in this market for money would graph as a:

A) vertical line.
B) horizontal line.
C) line sloping upward to the right.
D) line sloping downward to the right.

Question 31

The total demand for money curve will shift to the right as a result of:

A) an increase in nominal GDP.
B) an increase in the interest rate.
C) a decline in the interest rate.
D) a decline in nominal GDP.

Question 32

Which line in the above graph would best reflect the slope of the total demand for money curve?

A) line 4
B) line 3
C) line 2
D) line 1

Question 33

The total demand for money will shift to the left as a result of:

A) a decline in nominal GDP.
B) an increase in the price level.
C) a change in the interest rate.
D) an increase in nominal GDP.

Question 34

Refer to the above information.At equilibrium in the market for money,the total amount of money demanded is:

A) $500
B) $480
C) $460
D) $440

Question 35

Refer to the above diagram for the market for money.The total demand for money is shown by:

A) D₁.
B) D₂.
C) S.
D) D₃.

Question 36

An increase in nominal GDP increases the demand for money because:

A) interest rates will rise.
B) more money is needed to finance a larger volume of transactions.
C) bond prices will fall.
D) the opportunity cost of holding money will decline.

Question 37

Assume the equation for the total demand for money is L =.4Y + 80 - 4i,where L is the amount of money demanded,Y is gross domestic product,and i is the interest rate.If gross domestic product is $200 and the interest rate is 10 (percent),what amount of money will society want to hold?

A) $200
B) $120
C) $320
D) $160

Question 38

In which of the following instances can we be certain that the quantity of money demanded by the public will decrease?

A) nominal GDP decreases and the interest rate decreases
B) nominal GDP increases and the interest rate decreases
C) nominal GDP decreases and the interest rate increases
D) nominal GDP increases and the interest rate increases

Question 39

It is assumed that households and businesses want to hold for transactions purposes an amount of money equal to one-half of the GDP.The table shows the amounts of money that households and businesses want to hold as an asset at various interest rates.
Refer to the information above.If the GDP is $200 and the interest rate is 6,what total amount of money will households and businesses want to hold?

A) $120
B) $140
C) $160
D) $180

Question 40

Refer to the above graph,in which D_t is the transactions demand for money,D_m is the total demand for money,and S_m is the supply of money.The transactions demand for money in this market for money is:

A) $125
B) $175
C) $250
D) $325

Question 41

The equilibrium rate of interest in the market for money is determined by:

A) the intersection of the supply of money and the asset demand for money.
B) the intersection of the supply of money and the transactions demand for money.
C) the intersection of the supply of money and the total demand for money.
D) none of the above.

Question 42

If in the market for money the quantity of money demanded exceeds the money supply,we would expect the interest rate to:

A) fall,causing households and businesses to hold less money.
B) rise,causing households and businesses to hold less money.
C) rise,causing households and businesses to hold more money.
D) fall,causing households and businesses to hold more money.

Question 43

Refer to the information below.If the money supply is $160,the equilibrium interest rate will be:
Columns (1)and (2)indicate the transactions demand (D_t)for money and columns (1)and (3)show the asset demand (D_a)for money:

A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 4 percent.

Question 44

If the supply of money is reduced,we would expect:

A) the demand for money to increase.
B) interest rates to fall
C) bond prices to fall.
D) none of the above to occur.

Question 45

The interest rate will fall when the:

A) quantity of money demanded exceeds the quantity of money supplied.
B) quantity of money supplied exceeds the quantity of money demanded.
C) demand for money increases.
D) supply of money decreases.

Question 46

Refer to the market for money diagram below.Other things being equal,if the Bank of Canada increases the stock of money,the:

A) S curve would shift leftward and the equilibrium interest rate would rise.
B) S curve would shift rightward and the equilibrium interest rate would fall.
C) D would shift leftward and the equilibrium interest rate would fall.
D) S curve would shift rightward,but the effect on the equilibrium interest rate would be uncertain.

Question 47

Which statement is true?

A) Bond prices and the interest rate are inversely related.
B) A lower interest rate raises the opportunity cost of holding money.
C) The supply of money is directly related to the interest rate.
D) The total demand for money is directly related to the interest rate.

Question 48

Refer to the graph below,in which D_t is the transactions demand for money,D_m is the total demand for money,and S_m is the supply of money.If the market for money is in equilibrium at a 6 percent rate of interest and the money supply increases,then S_m2 will shift to:

A) S_m3 and the interest rate will be 4 percent.
B) S_m3 and the interest rate will be 8 percent.
C) S_m1 and the interest rate will be 8 percent.
D) S_m1 and the interest rate will be 4 percent.

Question 49

Refer to the table below.If the transactions demand for money is $400 billion,an increase in the money supply from $800 billion to $900 billion would cause the equilibrium interest rate to:

A) rise to 7 percent.
B) rise to 6 percent.
C) fall to 4 percent.
D) remain at 5 percent.

Question 50

Refer to the above information.An increase in the money supply of $20 billion will cause the equilibrium interest rate to:

A) fall by 4 percentage points.
B) fall by 2 percentage points.
C) rise by 4 percentage points.
D) rise by 2 percentage points.

Question 51

Refer to the above table.Suppose the transactions demand for money is equal to 20 percent of the nominal GDP,the supply of money is $800 billion,and the asset demand for money is that shown in the table.If the nominal GDP is $2000 billion,the equilibrium interest rate is:

A) 4 percent.
B) 5 percent.
C) 6 percent.
D) 7 percent.

Question 52

If the quantity of money demanded exceeds the quantity supplied:

A) the supply-of-money curve will shift to the left.
B) the demand-for-money curve will shift to the right.
C) the interest rate will fall.
D) the interest rate will rise.

Question 53

It is assumed that households and businesses want to hold for transactions purposes an amount of money equal to one-half of the GDP.The table shows the amounts of money that households and businesses want to hold as an asset at various interest rates.

Refer to the information above.If the GDP is $300 and the supply of money is $230,the equilibrium interest rate will be:

A) 8 percent.
B) 6 percent.
C) 2 percent.
D) 4 percent.

Question 54

If the demand for money and the supply of money both decrease,we can conclude that at the equilibrium:

A) interest rate will decline,but we cannot predict the change in the equilibrium quantity of money.
B) quantity of money and the equilibrium interest rate will both increase.
C) quantity of money will increase,but we cannot predict the change in the equilibrium interest rate.
D) quantity of money will decline,but we cannot predict the change in the equilibrium interest rate.

Question 55

Refer to the above information.The equilibrium interest rate is:

A) 2 percent.
B) 4 percent.
C) 6 percent.
D) 8 percent.

Question 56

When the market for money is in equilibrium:

A) the quantity of money demanded equals the quantity of money supplied.
B) the interest rate is neither increasing nor decreasing.
C) bond prices are stable.
D) all of the above hold true.

Question 57

Which of the following statements is correct?

A) Interest rates and bond prices vary directly.
B) Interest rates and bond prices vary inversely.
C) Interest rates and bond prices are unrelated.
D) Interest rates and bond prices vary directly during inflations and inversely during recessions.

Question 58

Refer to the above table.Suppose the transactions demand for money is $300 billion and the money supply is $700 billion.A decrease in the money supply to $600 billion would cause the interest rate to:

A) rise to 7 percent.
B) rise to 6 percent.
C) fall to 4 percent.
D) fall to 5 percent.

Question 59

If in the market for money the money supply exceeds the quantity of money households and businesses want to hold,we would expect the interest rate to:

A) fall,causing households and businesses to hold less money.
B) rise,causing households and businesses to hold less money.
C) rise,causing households and businesses to hold more money.
D) fall,causing households and businesses to hold more money.

Question 60

A disequilibrium in the market for money is mainly corrected via a change in:

A) bond prices.
B) the price level.
C) saving levels.
D) the money supply.

Question 61

In the consolidated balance sheet of the Bank of Canada,loans to chartered banks are:

A) a liability of the Bank of Canada and chartered banks.
B) an asset of the Bank of Canada and chartered banks.
C) a liability of the Bank of Canada and an asset for chartered banks.
D) an asset of the Bank of Canada and a liability for chartered banks.

Question 62

Refer to the above market for money diagram.If the interest rate was at 8 percent,people would:

A) sell bonds,which would cause bond prices to fall and the interest rate to fall.
B) buy bonds,which would cause bond prices to rise and the interest rate to fall.
C) have insufficient liquidity,which would cause them to reduce their spending on consumer goods.
D) buy bonds,which would cause bond prices to fall and the interest rate to rise.

Question 63

Suppose the demand for money and the supply of money increase simultaneously.We can:

A) expect the interest rate to rise and bond prices to fall.
B) expect the interest rate to fall and bond prices to rise.
C) the nominal GDP to expand.
D) not predict what will happen to interest rates or bond prices.

Question 64

Which of the following statements best describes the Bank of Canada? It is:

A) a publicly owned and publicly controlled central bank,whose basic goal is to provide income for the Government of Canada.
B) a privately owned and publicly controlled central bank,whose basic goal is to earn profits for its owners.
C) a publicly owned and publicly controlled central bank,whose basic goal is to control the money supply and interest rates and maintain price stability and it is an independent agency of government.
D) a privately owned and publicly controlled central bank,whose basic function is to minimize the risks in chartered banking in order to make it a reasonably profitable industry.

Question 65

The price of a bond with no expiration date is originally $5,000 and it pays an annual interest payment of $500.If the price of the bond falls to $3,000,then the effective interest rate yield to a new buyer of the bond is:

A) 14.4 percent.
B) 16.6 percent.
C) 11.0 percent.
D) 9.0 percent.

Question 66

The price of a bond having no expiration date is originally $8000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

A) 10 percent.
B) 12 percent.
C) 14 percent.
D) 16 percent.

Question 67

Refer to the above market for money diagram.If the interest rate was at 3 percent,people would:

A) sell bonds,which would cause bond prices to fall and the interest rate to rise.
B) buy bonds,which would cause bond prices to fall and the interest rate to rise.
C) sell bonds,which would cause bond prices to rise and the interest rate to rise.
D) buy bonds,which would cause bond prices to rise but have an uncertain effect upon the interest rate.

Question 68

Which of the following is the most important function of the Bank of Canada?

A) the collection or clearing of cheques among chartered banks
B) regulating the supply of money
C) acting as a fiscal agent for the federal government
D) holding the reserves of chartered banks

Question 69

Refer to the above market for money diagram.Given D_m and S_m,an interest rate of i₃ is not sustainable because:

A) the supply of bonds in the bond market will decline and the interest rate will rise.
B) the supply of bonds in the bond market will increase and the interest rate will decline.
C) the demand for bonds in the bond market will decline and the interest rate will rise.
D) the demand for bonds in the bond market will rise and the interest rate will fall.

Question 70

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000.If the price of this bond increases by $2500,the interest rate in effect will:

A) decrease by 1 percentage point.
B) decrease by 2 percentage points.
C) increase by 1 percentage point.
D) increase by 2 percentage points.

Question 71

An important routine function of the Bank of Canada is:

A) to help new chartered banks sell capital stock.
B) to supply the economy with paper currency.
C) to advise chartered banks as to the most profitable ways of reinvesting profits.
D) to help chartered banks develop correspondent relationships with foreign banks.

Question 72

In the consolidated balance sheet of the Bank of Canada,chartered bank reserves held by the Bank of Canada are:

A) a liability of the Bank of Canada and chartered banks.
B) an asset of the Bank of Canada and chartered banks.
C) a liability of the chartered banks and an asset for the Bank of Canada.
D) an asset of the chartered banks and a liability for the Bank of Canada.

Question 73

The following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent.
Refer to the above information.If the price of this bond falls by $200,the interest rate in effect will:

A) rise by 2.5 percentage points.
B) rise by 5 percentage points.
C) fall by 2.5 percentage points.
D) fall by 5 percentage points.

Question 74

If there is an increase in nominal GDP,we would expect:

A) the demand for money to increase.
B) the interest rate to rise.
C) bond prices to fall.
D) all of the above to occur.

Question 75

The Bank of Canada:

A) acts as a fiscal agent for the federal government.
B) supplies the economy with paper currency.
C) acts as the chartered banks' bank.
D) does all of the above.

Question 76

The price of a bond with no expiration date is $10,000 and it has a fixed annual interest payment of $2,000.If the bond is sold to a new owner for a price of $12,500,then the effective interest rate yield on the bond is now:

A) 22 percent.
B) 18 percent.
C) 17 percent.
D) 16 percent.

Question 77

The following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent.
Refer to the above information.If the price of this bond increases to $1,250,the interest rate in effect will:

A) fall to 9 percent.
B) fall to 8 percent.
C) rise to 11 percent.
D) rise to 12 percent.

Question 78

A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1000.If the price of this bond decreases by $2000,the interest rate in effect will:

A) decrease by 1.5 percentage points.
B) decrease by 2.5 percentage points.
C) increase by 1.5 percentage points.
D) increase by 2.5 percentage points.

Question 79

Which of the following is an asset on the balance sheet of the Bank of Canada?

A) reserves of chartered banks
B) Government of Canada deposits
C) Bank of Canada notes in circulation
D) advances to chartered banks

Question 80

Refer to the above market for money diagram.The equilibrium interest rate is:

A) i₁.
B) i₂.
C) i₃.
D) not determinable without further information.