ECON 303 Chapter 5 Study Questions
1) If the expected return on U.S. Treasury bonds rises from 5 to 10 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock _____ relative to U.S. Treasury bonds and the demand for GE stock _____.
(a) rises; rises
(b) rises; falls
(c) falls; rises
(d) falls; falls
Answer: D
2) When people begin to expect a large stock market decline, the demand curve for bonds shifts to the _____ and the interest rate _____.
(a) right; rises
(b) right; falls
(c) left; falls
(d) left; rises
Answer: B
3) Lower expected interest rates in the future ____ the demand for long-term bonds today and shift the demand curve to the _____.
(a) increase; left
(b) increase; right
(c) decrease; left
(d) decrease; right
Answer: B
4) When bond interest rates become less volatile, the demand for bonds _____ and the interest rate _____.
(a) increases; rises
(b) increases; falls
(c) decreases; falls
(d) decreases; rises
Answer: B
5) In an expanding economy with growing wealth, the demand for bonds _____ and the demand curve for bonds shifts to the _____.
(a) rises; right
(b) rises; left
(c) falls; right
(d) falls; left
Answer: A
Figure 5-1
6) In Figure 5-1, one factor that would not have caused the supply of bonds to increase (shift to the right) is
(a) a decrease in government budget deficits.
(b) an increase in expected inflation.
(c) expectations of more profitable investment opportunities.
(d) a business cycle expansion.
Answer: A
7) In Figure 5-1, factors that could cause the supply of bonds to increase (shift to the right) include:
(a) an increase in government budget deficits.
(b) an increase in expected inflation.
(c) expectations of more profitable investment opportunities.
(d) all of the above.
(e) only (b) and (c) of the above.
Answer: D
Figure 5-2
8) In Figure 5-2, factors that could cause the supply of bonds to increase (shift to the right) include:
(a) a decrease in government budget deficits.
(b) a decrease in expected inflation.
(c) expectations of more profitable investment opportunities.
(d) all of the above.
(e) only (b) and (c) of the above.
Answer: C
9) When comparing the Loanable Funds and Liquidity Preference Frameworks of interest rate determination, which of the following are true?
(a) The loanable funds framework is easier to use when analyzing the effects from changes in expected inflation.
(b) The liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of money.
(c) In most instances, the two approaches to interest rate determination yield the same predictions.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
Answer: D
10) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus,
(a) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
(b) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
(c) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
(d) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
Answer: A
11) The opportunity cost of holding money is
(a) the level of income.
(b) the price level.
(c) the interest rate.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: C
12)
A(n) ______ in the
money supply creates excess demand for _______, causing interest rates
to _______.
(a) increase; money; rise
(b) increase; bonds; fall
(c) decrease; bonds; rise
(d) decrease; bonds; fall
(e) decrease; money; fall
Answer: B
Figure 5-3
13) In Figure 5-3, the increase in the interest rate from i2 to i1 can be explained by
(a) a decrease in money growth.
(b) an increase in the expected price level.
(c) an increase in income.
(d) both (a) and (c) of the above.
(e) both (b) and (c) of the above.
Answer: E
Figure 5-4
14) In Figure 5-4, the decrease in the interest rate from i1 to i2 can be explained by
(a) a decrease in money growth.
(b) an increase in money growth.
(c) a decline in the expected price level.
(d) only (a) and (b) of the above.
Answer: B
Figure 5-5
15) Figure 5-5 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the
(a) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
(b) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
(c) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
(d) liquidity effect is smaller than the expected inflation
effect and interest rates adjust slowly
to changes in expected inflation.
Answer: A
Figure 5-6
16) Figure 5-6 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the
(a) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
(b) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
(c) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
(d) liquidity effect is smaller than the expected inflation
effect and interest rates adjust slowly
to changes in expected inflation.
Answer: C
Figure 5-7
17) Figure 5-7 illustrates the effect of an increased rate of money supply growth. From the figure, one can conclude that the
(a) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
(b) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
(c) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
(d) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
Answer: D