Deck 11: Money Demand and the Equilibrium Interest Rate

Question 1

The market-determined prices of existing bonds and interest rates are directly related.

Answer 1

False

Question 2

The average monthly balance in Bobby's bank account is $3,000.Bobby spends the same amount of money each day during a 30-day month,and at the end of the month his account balance is $0.Bobby spends his money at a constant rate of ________ per day.

A)$75
B)$100
C)$200
D)$300

Answer 2

C

Question 3

The average monthly balance in Yolanda's bank account is $1,800.Yolanda spends the same amount of money each day during a 30-day month,and at the end of the month her account balance is $0.Yolanda spends her money at a constant rate of ________ per day.

A)$60
B)$120
C)$180
D)$360

Answer 3

B

Question 4

Related to the Economics in Practice on p.526: If the estate in the Chekhov play Uncle Vanya is earning 2 percent,yet a potential buyer wants to earn more than 2 percent,the sales price of the estate would have to

A)fall.
B)rise.
C)double.
D)no price will bring a higher return

Question 5

The price of bonds and the interest rate are

A)positively related.
B)negatively related.
C)sometimes positively related and other times negatively related,depending on the bond payments.
D)not related.

Question 6

Veronica's income is $4,000 a month.She deposits $800 in a saving account,buys $300 worth of government securities,and leaves the rest for daily transactions.Veronica's transaction money demand is

A)$2,900.
B)$3,200.
C)$3,700.
D)$5,100.

Question 7

The average monthly balance in Tony's bank account is $650.Tony spends the same amount of money each day during the month and at the end of the month his account balance is $0.Tony's monthly starting balance is

A)$1,300.
B)$975.
C)$650.
D)$21.67.

Question 8

An increase in the interest rate will

A)have no impact on the optimal money balance.
B)increase the optimal money balance.
C)lower the optimal money balance.
D)either increase or decrease the optimal money balance depending on the level of current household wealth.

Question 9

Lisa's optimal monetary balance has decreased.This could have been caused by

A)an increase in the amount of transactions spending.
B)a decrease in the interest rate.
C)a reduction in the costs paid for switching from bonds to money.
D)an increase in the price of bonds.

Question 10

When the interest rate rises,bond values

A)rise.
B)fall.
C)are unchanged because the interest rate paid on a bond is fixed.
D)will either increase or decrease depending on the type of bond.

Question 11

Firms and governments can borrow funds by issuing bonds.

Question 12

Mary is paid on the 1st of every month and her rent is due on the 15th of every month.This is an example of the

A)cash flow problem.
B)financial float.
C)money management problem.
D)nonsynchronization of income and spending.

Question 13

Related to the Economics in Practice on p.526: If the estate in the Chekhov play Uncle Vanya is earning 2 percent,the interest rate on suitable securities is 5 percent,and the securities are a better risk than the estate,a potential buyer should require the price of the estate be ________ until the equivalent return on the estate is ________.

A)raised;5 percent
B)lowered;5 percent
C)lowered;greater than 5 percent
D)raised;greater than 5 percent

Question 14

Which of the following is NOT a motive for holding money?

A)the transaction motive
B)the asset motive
C)the speculative motive
D)All of the above are motives for holding money.

Question 15

The interest rate paid on bonds increases from 4% to 7%.This will cause

A)no change in the optimal balance of money because checking deposits don't earn interest.
B)the optimal balance of money to increase because it raises the opportunity costs of holding money.
C)the optimal balance of money to decrease because it raises the opportunity cost of holding money.
D)the optimal balance of money to increase because it reduces the opportunity cost of holding money.

Question 16

John's optimal money balance has increased.This could have been caused by

A)a reduction in the costs paid for switching from bonds to money.
B)a decrease in the price of bonds.
C)a decrease in the amount of transactions spending.
D)a decrease in the interest rate.

Question 17

When interest rates fall,bond values rise.

Question 18

Ed's monthly starting balance is $3,000.Ed spends $100 per day.Initially,Ed keeps all of his income in a non-interest-bearing checking account.Ed decided to change his strategy and at the beginning of each month he deposits one-third of his income into his checking account and buys two bonds with the remainder of his income.After 10 days he cashes in one bond and 10 days after that he cashes in the other bond.Which of the following statements is TRUE?

A)If Ed uses either strategy,his average monthly balance is $1,500.
B)The second strategy involves lower money management costs because Ed now earns interest on the bonds he has purchased.
C)Ed's optimal money balance is $100.
D)If the interest rate paid on bonds decreases,the opportunity cost of Ed's original strategy is reduced.

Question 19

The average monthly balance in Aaron's bank account is $2,000.Aaron spends the same amount of money each day during the month,and at the end of the month his account balance is $0.Aaron's monthly starting balance is

A)$2,000.
B)$3,500.
C)$4,000.
D)$6,000.

Question 20

A bond with a face value of $1,000

A)will always sell for more than the face value.
B)will always sell for less than the face value.
C)will always sell for exactly the face value.
D)will sell for the market determined price.

Question 21

If interest rates increase to a very high level,people will most likely hold

A)more bonds and less cash.
B)less bonds and less cash.
C)less bonds and more cash.
D)more bonds and more cash.

Question 22

Refer to the information provided in Figure 11.1 below to answer the questions that follow. Figure 11.1
Refer to Figure 11.1.A movement from Point B to Point D can be caused by

A)a decrease in income.
B)an increase in the interest rate.
C)a decrease in the interest rate.
D)an increase in nominal aggregate output.

Question 23

Refer to the information provided in Figure 11.1 below to answer the questions that follow. Figure 11.1
Refer to Figure 11.1.The money demand curve will shift from to if

A)the price level increases.
B)nominal output decreases.
C)interest rates fall.
D)interest rates rise.

Question 24

If interest rates are lower than what individuals consider normal,they will

A)increase their transaction money demand.
B)increase their speculative money demand.
C)decrease their speculative money demand.
D)decrease their transaction money demand.

Question 25

The transaction demand for money

A)decreases when interest rates decrease below normal.
B)increases when interest rates increase above normal.
C)decreases when interest rates increase above normal.
D)increases when the price level rises.

Question 26

The transactions demand for money is

A)positively related to aggregate income.
B)positively related to the interest rate.
C)negatively related to the price level.
D)negatively related to the interest rate.

Question 27

Refer to the information provided in Figure 11.1 below to answer the questions that follow. Figure 11.1
Refer to Figure 11.1.The movement from C to B could be cause by

A)a decrease in the interest rate.
B)an increase in the interest rate.
C)a decrease in income.
D)an increase in nominal output.

Question 28

Refer to the information provided in Figure 11.2 below to answer the questions that follow. Figure 11.2
Refer to Figure 11.2.Suppose money demand is currently at Point A.A decrease in the interest rate to 5%,ceteris paribus,will likely

A)decrease the quantity of money demanded from $200 million to $100 million.
B)increase the quantity of money demanded from $100 million to $200 million.
C)increase the quantity of money demanded from $100 million to $150 million.
D)increase the quantity of money demanded from $150 million to $300 million.

Question 29

The transaction demand for money depends on all of the following EXCEPT

A)income.
B)the price level.
C)the interest rate.
D)the amount of transactions spending.

Question 30

As the interest rate falls,people hold ________ money instead of bonds because the opportunity cost of holding money has ________.

A)more;fallen
B)less;fallen
C)less;risen
D)more;risen

Question 31

Refer to the information provided in Figure 11.1 below to answer the questions that follow. Figure 11.1
Refer to Figure 11.1.A movement from Point B to Point A can be caused by

A)a decrease in income.
B)an increase in the price level.
C)a decrease in the interest rate.
D)an increase in the interest rate.

Question 32

The speculative demand for money is

A)positively related to income.
B)positively related to interest rate.
C)negatively related to interest rate.
D)negatively related to income.

Question 33

Refer to the information provided in Figure 11.1 below to answer the questions that follow. Figure 11.1
Refer to Figure 11.1.A movement from Point D to Point A can be caused by

A)a decrease in the interest rate.
B)an increase in income.
C)a decrease in nominal aggregate output.
D)an increase in the interest rate.

Question 34

If the interest rate is higher than normal,people are more likely to hold

A)bonds instead of money because as the interest rate starts to rise,the value of the bonds will increase.
B)bonds instead of money because the opportunity cost of money is high.
C)money instead of bonds because the brokerage fees and other costs of buying bonds are high when the interest rate is low.
D)money instead of bonds because there is a speculative motive for holding a larger amount of money.

Question 35

Refer to the information provided in Figure 11.2 below to answer the questions that follow. Figure 11.2
Refer to Figure 11.2.Suppose money demand is currently at Point A.An increase money demand could be caused by

A)an increase in the interest rate.
B)an increase in income.
C)a decrease in the interest rate.
D)a decrease in income.

Question 36

Which of the following will most likely cause a decrease in the quantity of money demanded?

A)an increase in the price level
B)an increase in the interest rate
C)an increase in nominal aggregate output
D)a decrease in the interest rate

Question 37

The speculative demand for money

A)increases when income increases above normal.
B)decreases when interest rates decrease below normal.
C)increases when interest rates decrease below normal.
D)decreases when the price level decreases below normal.

Question 38

Refer to the information provided in Figure 11.1 below to answer the questions that follow. Figure 11.1
Refer to Figure 11.1.All of the following events can cause a movement from Point E to Point A EXCEPT

A)an increase in the aggregate price level.
B)an increase in the nominal aggregate output.
C)a decrease in the interest rate.
D)an increase in real output and income.

Question 39

Refer to the information provided in Figure 11.2 below to answer the questions that follow. Figure 11.2
Refer to Figure 11.2.Suppose the money demand is currently at Point D.A movement to point C could be caused by

A)a decrease in the interest rate.
B)a decrease in nominal output.
C)an increase in the interest rate.
D)an increase in the price level.

Question 40

The transaction demand for money depends on

A)the money supply.
B)the price level.
C)bond prices.
D)the interest rate.

Question 41

The optimal money balance will increase as the interest rate rises,ceteris paribus.

Question 42

A mismatch between the timing of money inflow to the household and the timing of money outflow for household expenses is known as the nonsynchronization of income and spending.

Question 43

Related to the Economics in Practice on p.531: The increase in the number of ATMs in Italy has had what impact on the market for cash?

A)demand has increased
B)demand has decreased
C)supply has increased
D)supply had decreased

Question 44

Related to the Economics in Practice on p.531: In Italy,checking accounts pay interest.As these interest rates increase,ceteris paribus,

A)the demand for cash increases.
B)the demand for cash decreases.
C)the demand for cash does not change.
D)the supply of cash decreases.

Question 45

The ________ motive shifts the money demand curve,and the ________ motive causes movements along the same money demand curve.

A)speculative;transaction
B)transaction;precautionary
C)transaction;speculative
D)precautionary;transaction

Question 46

Refer to the information provided in Figure 11.2 below to answer the questions that follow. Figure 11.2
Refer to Figure 11.2.Suppose that money demand is currently at Point B.A movement to Point D could be caused by

A)an increase in income,ceteris paribus.
B)an increase in the price level,ceteris paribus.
C)a decrease in the price level,ceteris paribus.
D)a decrease in the interest rate,ceteris paribus.

Question 47

Refer to the information provided in Figure 11.4 below to answer the questions that follow. Figure 11.4
Refer to Figure 11.4.At an interest rate of 8%,there is

A)an excess demand for money of $400 billion.
B)an excess supply of money of $800 billion.
C)an excess supply of money of $400 billion.
D)an excess demand for money of $800 billion.

Question 48

A decrease in nominal aggregate output will lead to an increase in the interest rate.

Question 49

Refer to the information provided in Figure 11.3 below to answer the questions that follow. Figure 11.3
Refer to Figure 11.3.A decrease in nominal aggregate output,ceteris paribus,will likely

A)increase the equilibrium interest rate without changing equilibrium money holdings.
B)decrease both the equilibrium interest rate and equilibrium money holdings.
C)increase the equilibrium interest rate and decrease equilibrium money holdings.
D)decrease the equilibrium interest rate without changing equilibrium money holdings.

Question 50

When the aggregate price level (P)is multiplied by real aggregate income (Y),the result is

A)the aggregate money multiplier.
B)the real aggregate price level.
C)nominal aggregate output.
D)aggregate money demand.

Question 51

An excess demand for money drives interest rates down.

Question 52

Refer to the information provided in Figure 11.3 below to answer the questions that follow. Figure 11.3
Refer to Figure 11.3.An increase in nominal aggregate output,ceteris paribus,will likely

A)increase both the equilibrium interest rate and equilibrium money holdings.
B)decrease the equilibrium interest rate without changing equilibrium money holdings.
C)increase the equilibrium interest rate without changing equilibrium money holdings.
D)keep the equilibrium interest constant and increase equilibrium money holdings.

Question 53

Refer to the information provided in Figure 11.3 below to answer the questions that follow. Figure 11.3
Refer to Figure 11.3.A decrease in the money supply and an increase in nominal aggregate output will,for sure,

A)increase the equilibrium interest rate.
B)decrease the equilibrium interest rate.
C)increase equilibrium money holdings.
D)decrease equilibrium money holdings.

Question 54

Less switching from bonds to money means less interest revenue lost,but higher money management costs.

Question 55

Refer to the information provided in Figure 11.3 below to answer the questions that follow. Figure 11.3
Refer to Figure 11.3.An increase in the money supply,ceteris paribus,will likely

A)increase the equilibrium interest rate and decrease equilibrium money holdings.
B)increase the equilibrium interest rate without changing equilibrium money holdings.
C)decrease the equilibrium interest rate and increase equilibrium money holdings.
D)decrease the equilibrium interest rate without changing equilibrium money holdings.

Question 56

If people think interest rates are above their normal levels,they will want to hold bonds in anticipation of a capital gain when interest rates fall to their normal level.

Question 57

Investors may wish to hold bonds when interest rates are low with the hope of selling them when interest rates increase.

Question 58

Refer to the information provided in Figure 11.3 below to answer the questions that follow. Figure 11.3
Refer to Figure 11.3.At an interest rate of 3%,there is a

A)shortage of money and the interest rate will decline.
B)shortage of money and the interest rate will rise.
C)surplus of money and the interest rate will decline.
D)surplus of money and the interest rate will rise.

Question 59

Which of the following causes the quantity demanded of money to increase?

A)an increase in income
B)a decrease in income
C)a decrease in the price level
D)a decrease in the interest rate

Question 60

Refer to the information provided in Figure 11.3 below to answer the questions that follow. Figure 11.3
Refer to Figure 11.3.At an interest rate of 6%,there is a

A)shortage of money and the interest rate will decline.
B)shortage of money and the interest rate will rise.
C)surplus of money and the interest rate will decline.
D)surplus of money and the interest rate will rise.

Question 61

Refer to the information provided in Figure 11.4 below to answer the questions that follow. Figure 11.4
Refer to Figure 11.4.At an interest rate of 3%,there is

A)an excess supply of money of $400 billion.
B)an excess supply of money of $800 billion.
C)an excess demand for money of $800 billion.
D)an excess demand for money of $400 billion.

Question 62

An increase in the level of nominal aggregate output and the purchase of government securities by the Fed will have what effect on the equilibrium interest rate?

A)no effect on the interest rate
B)a decrease in the interest rate
C)an increase in the interest rate
D)an indeterminate effect on the interest rate

Question 63

Refer to the information provided in Figure 11.4 below to answer the questions that follow. Figure 11.4
Refer to Figure 11.4.At an interest rate of 3%,firms and households

A)are satisfied with the amount of money they are holding.
B)will attempt to increase their holdings of money by selling bonds.
C)will attempt to increase both their holdings of money and their holdings of bonds.
D)will attempt to reduce their holdings of money by buying bonds.

Question 64

Refer to the information provided in Figure 11.4 below to answer the questions that follow. Figure 11.4
Refer to Figure 11.4.The money market will be in equilibrium at an interest rate of

A)0%.
B)3%.
C)5%.
D)8%.

Question 65

A shortage of money in the money market can be eliminated through

A)an increase in nominal aggregate output.
B)an increase in the price level.
C)a decrease in interest rates.
D)an increase in money supply.

Question 66

A shortage of money in the money market causes

A)a decrease in the equilibrium interest rate.
B)an increase in the quantity demanded of money.
C)an increase in the equilibrium interest rate.
D)a decrease in the money supply.

Question 67

Refer to the information provided in Figure 11.5 below to answer the questions that follow. Figure 11.5
Refer to Figure 11.5.The money supply curve will shift from to if

A)the Fed increases the reserve requirement.
B)the Fed decreases the discount rate.
C)the equilibrium level of output increases.
D)the Fed buys U.S.government securities in the open market.

Question 68

Refer to the information provided in Figure 11.5 below to answer the questions that follow. Figure 11.5
Refer to Figure 11.5.The money supply curve will shift from to ,if

A)the Fed increases the discount rate.
B)the price level increases.
C)the equilibrium level of output decreases.
D)the Fed buys U.S.government securities in the open market.

Question 69

When the Fed sells government securities,ceteris paribus,the money supply shifts to the ________ and the equilibrium interest rate ________.

A)left;rises
B)right;rises
C)right;falls
D)left;falls

Question 70

If there is a surplus of money in the money market,the Fed can eliminate it by

A)increasing money demand.
B)decreasing money demand.
C)increasing money supply.
D)decreasing money supply.

Question 71

Refer to the information provided in Figure 11.4 below to answer the questions that follow. Figure 11.4
Refer to Figure 11.4.At an interest rate of 5%,firms and households

A)are satisfied with the amount of money they are holding.
B)will attempt to reduce their holdings of money by buying bonds.
C)will attempt to increase their holdings of money by selling bonds.
D)will attempt to increase both their holdings of money and their holdings of bonds.

Question 72

If the quantity of money demanded is greater than the quantity of money supplied,then the interest rate will

A)change in an uncertain direction.
B)rise.
C)remain constant.
D)fall.

Question 73

A surplus of money in the money market causes

A)a decrease in the equilibrium interest rate.
B)a decrease in the money supply.
C)an increase in the demand for money.
D)a decrease in the quantity demanded of money.

Question 74

What will happen to the equilibrium interest rate when both money supply and nominal aggregate output decrease?

A)The equilibrium interest rate increases.
B)The equilibrium interest rate decreases.
C)The equilibrium interest rate remains constant.
D)The impact on the equilibrium interest rate is ambiguous.

Question 75

Refer to the information provided in Figure 11.5 below to answer the questions that follow. Figure 11.5
Refer to Figure 11.5.The money supply curve will shift from to if

A)the Fed increases the reserve requirement.
B)the Fed increases the discount rate.
C)the equilibrium level of output increases.
D)the Fed buys U.S.government securities in the open market.

Question 76

Decreasing the required reserve ratio shifts the money supply curve to the ________ and ________ the equilibrium interest rate.

A)left;increases
B)right;increases
C)left;decreases
D)right;decreases

Question 77

Refer to the information provided in Figure 11.5 below to answer the questions that follow. Figure 11.5
Refer to Figure 11.5.Assume the interest rate equals 4% and the money supply decreases from to .If the interest rate remains at 4%

A)money demand will increase.
B)money demand will decrease.
C)there will be an excess demand for money of $200 million.
D)there will be an excess supply of money of $200 million.

Question 78

Refer to the information provided in Figure 11.5 below to answer the questions that follow. Figure 11.5
Refer to Figure 11.5.If the money supply increases from to ,

A)money demand must decrease for the money market to return to equilibrium.
B)the interest rate will decrease to 4%.
C)the interest rate will increase to 8%.
D)the money market will return to equilibrium only if the money supply is increased to its original level.

Question 79

Refer to the information provided in Figure 11.4 below to answer the questions that follow. Figure 11.4
Refer to Figure 11.4.At an interest rate of 8%,firms and households

A)will attempt to increase their holdings of money by selling bonds.
B)are satisfied with the amount of money they are holding.
C)will attempt to increase both their holdings of money and their holdings of bonds.
D)will attempt to reduce their holdings of money by buying bonds.

Question 80

Refer to the information provided in Figure 11.5 below to answer the questions that follow. Figure 11.5
Refer to Figure 11.5.If the money supply decreases from to ,

A)money demand must increase for the money market to return to equilibrium.
B)the interest rate will fall to 4%.
C)the interest rate will increase to 6%.
D)the money market will return to equilibrium only if the money supply is decreased to its original level.