Question 1 Refer to Figure 14-2 . If the interest rate is 8 percent, there is an

Question

Question 1

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

there is an excess supply of money equal to $100 billion

there is an excess demand for money

there is an excess supply of money equal to $400 billion

the Fed will decrease the money supply

the interest rate will tend to rise

1 points   

Question 2

An open market purchase of bonds by the Fed

drains reserves from the banking system and decreases the money supply

injects reserves into the banking system and increases money demand

injects reserves into the banking system and increases the money supply

drains reserves from the banking system and increases the money supply

injects reserves into the banking system and decreases the money supply

1 points   

Question 3

Which of the following is correct with regard to the supply of money?

The money supply is inversely related to the interest rate.

The money supply is independent of the interest rate.

The money supply is positively related to the interest rate with a relatively flat slope.

The money supply curve is horizontal.

The money supply is positively related to the interest rate with a relatively steep slope.

1 points   

Question 4

In the short-run macro model, an increase in the money supply will

move the economy to the right along the aggregate expenditure line.

move the economy to the left along the aggregate expenditure line.

shift the aggregate expenditure line upward.

shift the aggregate expenditure line downward.

cause the aggregate expenditure line to rotate until it is flat.

1 points   

Question 5

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

there is also an excess demand for money

there is also an excess demand for bonds

there is also an excess supply of bonds

the interest rate will rise

the Fed must intervene to restore equilibrium

1 points   

Question 6

Which of the following would shift the money demand curve to the left?

A decrease in the price level.

An increase in the interest rate.

An increase in the price level.

An increase in real income.

1 points   

Question 7

The opportunity cost of holding money is

the dollar cost necessary to change other assets into money

the time cost of accessing funds

the value of the goods and services a person is able to obtain with the money

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

zero, because opportunity costs only apply to real assets, goods and services.

1 points   

Question 8

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

increase the money supply

decrease the money supply

increase money demand

decrease money demand

simply set a higher market interest rate

1 points   

Question 9

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

An increase in the price level

A decrease in real income

An increase in the interest rate

A decrease in the cost of converting other assets into money

A decrease in the price level

1 points   

Question 10

The money market achieves equilibrium when

individuals no longer want to spend their money

the price of bonds rises by an appropriate amount

buyers and sellers agree on a price for commodities

speculative balances are reduced to a minimum

individuals who hold bonds are satisfied with what they are holding

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

Explanation / Answer

1

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2

Option C

An open market purchase of bond will inject the reserves into the banking system as fed will print money to buy a bond and thus it will ultimately result in injecting reserves into the banking system. Injecting reserves in banking system will increase the money supply. The fed activity will affect the money demand in the market directly.

3

Option A

Increase in money supply will reduce the interest rate as the supply of laoanable funds will increase relative to the demand of the loanable funds

4

Option C

Increase in money supply will shift the aggregate expenditure curve outward or to the right

5

Option C

If there will excess supply of money, the interest rate will fall and no one would like to invest in bond for lower interest rate. Thus there will excess supply of bond

6

Option A

Change in interest rate will move along the money demand curve. Increase in real income or price level will shift the money demand curve to the right. Decrease in the price levels only will shift the money demand curve left.

7

Option D

Opportunity cost is the interest forgone if it would have been invested in any other asset.

8

Option B

Fed can affect the money demand. It can only affect money supply is open market purchase. By decrease the money supply with constant demand, the demand of loanable fund will rise and the interest rate will rise.

9

Option E

Decrease in price levels. As increase in price levels and decrease in real income will decrease the demand for money

10

Option E

Equilibrium is achieved when demand of money is equal to supply. It can be deduced from the fact that individual do not have the thirst to buy extra bond or sell the existing bond. Thus individuals who holds bonds are satisfied with what they are holding

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