Question 1

Suppose the Fed conducts an open market sale. We can expect this transaction to

Accepted Answer

A)  reduce the money supply, increase bond prices, and lower interest rates. 
B)  increase the money supply, lower bond prices, and lower interest rates. 
C)  increase the money supply, raise bond prices, and lower interest rates. 
D)  reduce the money supply, reduce bond prices, and increase interest rates. 
A)  reduce the money supply, increase bond prices, and lower interest rates. 
B)  increase the money supply, lower bond prices, and lower interest rates. 
C)  increase the money supply, raise bond prices, and lower interest rates. 
D)  reduce the money supply, reduce bond prices, and increase interest rates. D

Question 2

Figure 10-8  
-Refer to Figure 10-8. Short-run but not long-run equilibrium positions occur at points

Accepted Answer

A)  a and b. 
B)  b and c. 
C)  c and d. 
D)  a and c. 
A)  a and b. 
B)  b and c. 
C)  c and d. 
D)  a and c. B

Question 3

An increase in the money supply will reduce interest rates and increase the price of bonds.

Accepted Answer

A) True 
 B)False  True

Question 4

When the Fed sells government bonds in the open market, the money supply will increase.

Accepted Answer

A) True 
 B)False

Question 5

The interest rate on a bond is

Accepted Answer

A)  inversely related to its price. 
B)  directly related to its price. 
C)  determined by its face value. 
D)  determined by the time to maturity. 
A)  inversely related to its price. 
B)  directly related to its price. 
C)  determined by its face value. 
D)  determined by the time to maturity.

Question 6

Figure 10-6  
-Refer to Figure 10-6. If the economy is experiencing a recessionary gap, the Fed would

Accepted Answer

A)  sell government bonds, which would decrease the money supply and increase interest rates. The results of such a policy are represented in Panel (b). 
B)  buy government bonds, which would decrease the money supply and decrease interest rates. The results of such a policy are represented in Panel (a). 
C)  buy government bonds, which would increase the money supply and decrease interest rates. The results of such a policy are represented in Panel (a). 
D)  sell government bonds, which would increase the money supply and decrease interest rates. The results of such a policy are represented in Panel (a). 
A)  sell government bonds, which would decrease the money supply and increase interest rates. The results of such a policy are represented in Panel (b). 
B)  buy government bonds, which would decrease the money supply and decrease interest rates. The results of such a policy are represented in Panel (a). 
C)  buy government bonds, which would increase the money supply and decrease interest rates. The results of such a policy are represented in Panel (a). 
D)  sell government bonds, which would increase the money supply and decrease interest rates. The results of such a policy are represented in Panel (a).

Question 7

When the price of a bond rises, the interest rate paid on the bond also rises.

Accepted Answer

A) True 
 B)False

Question 8

What happens in the money market when there is an increase in the supply of money?

Accepted Answer

A)  The equilibrium quantity of money increases and the equilibrium interest rate increases. 
B)  The equilibrium quantity of money increases and the equilibrium interest rate decreases. 
C)  The equilibrium quantity of money decreases and the equilibrium interest rate increases. 
D)  The equilibrium quantity of money decreases and the equilibrium interest rate decreases. 
A)  The equilibrium quantity of money increases and the equilibrium interest rate increases. 
B)  The equilibrium quantity of money increases and the equilibrium interest rate decreases. 
C)  The equilibrium quantity of money decreases and the equilibrium interest rate increases. 
D)  The equilibrium quantity of money decreases and the equilibrium interest rate decreases.

Question 9

An increase in the money supply tends to reduce investment.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following does not cause the money demand curve to shift?

Accepted Answer

A)  a change in the interest rate 
B)  a change in the price level 
C)  a change in transfer costs 
D)  a change in real GDP 
A)  a change in the interest rate 
B)  a change in the price level 
C)  a change in transfer costs 
D)  a change in real GDP

Question 11

Holding everything else unchanged, higher interest rates in the U.S.

Accepted Answer

A)  increase the demand and reduce the supply of dollars leading to an increase in the exchange rate. 
B)  decrease the demand and the supply of dollars leading to an decrease in the exchange rate. 
C)  increase the demand and the supply of dollars leading to an increase in the exchange rate. 
D)  decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate. 
A)  increase the demand and reduce the supply of dollars leading to an increase in the exchange rate. 
B)  decrease the demand and the supply of dollars leading to an decrease in the exchange rate. 
C)  increase the demand and the supply of dollars leading to an increase in the exchange rate. 
D)  decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.

Question 12

Scenario 1
Consider two money management strategies. The first strategy is called the cash strategy in which an individual deposits her monthly earnings in a checking account and draws down equal amounts each day to finance her daily expenditures. Assume that she earns no interest on her checking accounts and funds are exhausted at the end of the month. The second strategy is called the bond fund strategy. Here the individual deposits one-quarter of her earnings in a checking account and the remaining three-quarters in a bond fund. The bond fund pays 1% interest per month. At the end of the week when the money in the checking account is exhausted, the individual replenishes it by withdrawing another one-quarter of her earnings from the bond fund for the next week. This process is repeated at the end of the second week and third week until the bond fund is exhausted.
-Refer to Scenario 1. In which strategy will the quantity of money demanded be greater?

Accepted Answer

A)  the cash strategy 
B)  the bond fund strategy 
C)  It will be the same in either strategy. 
D)  There is insufficient information to answer the question. 
A)  the cash strategy 
B)  the bond fund strategy 
C)  It will be the same in either strategy. 
D)  There is insufficient information to answer the question.

Question 13

Figure 10-1  
-Refer to Figure 10-1. Following the increase in supply from S1 to S2, at a price of $850, what is the interest rate?

Accepted Answer

A)  6.6% 
B)  15% 
C)  17.6% 
D)  23.5% 
A)  6.6% 
B)  15% 
C)  17.6% 
D)  23.5%

Question 14

The foreign exchange market

Accepted Answer

A)  is a government-run market where foreign currencies are traded. 
B)  is a bank-owned market through which people buy and sell currencies. 
C)  refers to the entire array of institutions through which people buy and sell currencies. 
D)  an open market run by the Federal Reserve through which banks buy and sell currencies. 
A)  is a government-run market where foreign currencies are traded. 
B)  is a bank-owned market through which people buy and sell currencies. 
C)  refers to the entire array of institutions through which people buy and sell currencies. 
D)  an open market run by the Federal Reserve through which banks buy and sell currencies.

Question 15

A $100 bond, which matures in one year, has a price of $75. The interest rate on this bond is

Accepted Answer

A)  20%. 
B)  25%. 
C)  33 1/3%. 
D)  50%. 
A)  20%. 
B)  25%. 
C)  33 1/3%. 
D)  50%.

Question 16

Suppose the government issues bonds to finance an increase in government spending. In the bond market,

Accepted Answer

A)  the demand curve shifts right, leading to an increase in bond prices, and a decrease in interest rates. 
B)  the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates. 
C)  the demand curve shifts left, leading to a decrease in bond prices, and an increase in interest rates. 
D)  the supply curve shifts left, leading to an increase in bond prices, and an increase in interest rates. 
A)  the demand curve shifts right, leading to an increase in bond prices, and a decrease in interest rates. 
B)  the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates. 
C)  the demand curve shifts left, leading to a decrease in bond prices, and an increase in interest rates. 
D)  the supply curve shifts left, leading to an increase in bond prices, and an increase in interest rates.

Question 17

Figure 10-3  
-Refer to Figure 10-3. If the interest rate is above the equilibrium rate, there will be

Accepted Answer

A)  an excess demand for money and the interest rate will rise. 
B)  an excess supply of money and the interest rate will fall. 
C)  an excess demand for money and the interest rate will fall. 
D)  an excess supply of money and the interest rate will rise. 
A)  an excess demand for money and the interest rate will rise. 
B)  an excess supply of money and the interest rate will fall. 
C)  an excess demand for money and the interest rate will fall. 
D)  an excess supply of money and the interest rate will rise.

Question 18

If bond prices rise,

Accepted Answer

A)  interest rates rise, which in turn, discourage investment. 
B)  interest rates fall, which in turn, discourage investment. 
C)  interest rates rise, which in turn, stimulate investment. 
D)  interest rates fall, which in turn, stimulate investment. 
A)  interest rates rise, which in turn, discourage investment. 
B)  interest rates fall, which in turn, discourage investment. 
C)  interest rates rise, which in turn, stimulate investment. 
D)  interest rates fall, which in turn, stimulate investment.

Question 19

An increase in the supply of bonds leads to

Accepted Answer

A)  an increase in the price of bonds, a decrease in the interest rate, and an increase in aggregate demand. 
B)  an increase in the price of bonds, an increase in the interest rate, and an increase in aggregate demand. 
C)  a decrease in the price of bonds, an increase in the interest rate, and an increase in aggregate demand. 
D)  a decrease in the price of bonds, an increase in the interest rate, and a decrease in aggregate demand. 
A)  an increase in the price of bonds, a decrease in the interest rate, and an increase in aggregate demand. 
B)  an increase in the price of bonds, an increase in the interest rate, and an increase in aggregate demand. 
C)  a decrease in the price of bonds, an increase in the interest rate, and an increase in aggregate demand. 
D)  a decrease in the price of bonds, an increase in the interest rate, and a decrease in aggregate demand.

Question 20

All other things unchanged, why does an increase in money demand cause the aggregate demand curve will shift to the left?

Accepted Answer

A)  Because the resulting increase in bond prices reduces consumption spending. 
B)  Because the resulting decrease in bond interest rate will lead to an increase in the quantity of investment and net exports. 
C)  Because the resulting higher interest rate will lead to a lower quantity of investment and net exports. 
D)  Because the resulting lower interest rate will lead to lower net exports. 
A)  Because the resulting increase in bond prices reduces consumption spending. 
B)  Because the resulting decrease in bond interest rate will lead to an increase in the quantity of investment and net exports. 
C)  Because the resulting higher interest rate will lead to a lower quantity of investment and net exports. 
D)  Because the resulting lower interest rate will lead to lower net exports.

Suppose the Fed conducts an open market sale. We can expect this transaction to

Figure 10-8 -Refer to Figure 10-8. Short-run but not long-run equilibrium positions occur at points

An increase in the money supply will reduce interest rates and increase the price of bonds.

When the Fed sells government bonds in the open market, the money supply will increase.

The interest rate on a bond is

Figure 10-6 -Refer to Figure 10-6. If the economy is experiencing a recessionary gap, the Fed would

When the price of a bond rises, the interest rate paid on the bond also rises.

What happens in the money market when there is an increase in the supply of money?

An increase in the money supply tends to reduce investment.

Which of the following does not cause the money demand curve to shift?

Holding everything else unchanged, higher interest rates in the U.S.

Figure 10-1 -Refer to Figure 10-1. Following the increase in supply from S₁ to S₂, at a price of $850, what is the interest rate?

The foreign exchange market

A $100 bond, which matures in one year, has a price of $75. The interest rate on this bond is

Suppose the government issues bonds to finance an increase in government spending. In the bond market,

Figure 10-3 -Refer to Figure 10-3. If the interest rate is above the equilibrium rate, there will be

If bond prices rise,

An increase in the supply of bonds leads to

All other things unchanged, why does an increase in money demand cause the aggregate demand curve will shift to the left?

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Exam 10: Financial Markets and the Economy

Suppose the Fed conducts an open market sale. We can expect this transaction to

Figure 10-8 -Refer to Figure 10-8. Short-run but not long-run equilibrium positions occur at points

An increase in the money supply will reduce interest rates and increase the price of bonds.

When the Fed sells government bonds in the open market, the money supply will increase.

The interest rate on a bond is

Figure 10-6 -Refer to Figure 10-6. If the economy is experiencing a recessionary gap, the Fed would

When the price of a bond rises, the interest rate paid on the bond also rises.

What happens in the money market when there is an increase in the supply of money?

An increase in the money supply tends to reduce investment.

Which of the following does not cause the money demand curve to shift?

Holding everything else unchanged, higher interest rates in the U.S.

Figure 10-1 -Refer to Figure 10-1. Following the increase in supply from S1 to S2, at a price of $850, what is the interest rate?

The foreign exchange market

A $100 bond, which matures in one year, has a price of $75. The interest rate on this bond is

Suppose the government issues bonds to finance an increase in government spending. In the bond market,

Figure 10-3 -Refer to Figure 10-3. If the interest rate is above the equilibrium rate, there will be

If bond prices rise,

An increase in the supply of bonds leads to

All other things unchanged, why does an increase in money demand cause the aggregate demand curve will shift to the left?

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Figure 10-1 -Refer to Figure 10-1. Following the increase in supply from S₁ to S₂, at a price of $850, what is the interest rate?