978-0133427073 Test Bank Chapter 4 Part 3

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71) If the liquidity effect is smaller than the other effects, and the adjustment of expected

inflation is slow, then the

A) interest rate will fall.

B) interest rate will rise.

C) interest rate will initially fall but eventually climb above the initial level in response to an

increase in money growth.

D) interest rate will initially rise but eventually fall below the initial level in response to an

increase in money growth.

72) When the growth rate of the money supply increases, interest rates end up being permanently

lower if

A) the liquidity effect is larger than the other effects.

B) there is fast adjustment of expected inflation.

C) there is slow adjustment of expected inflation.

D) the expected inflation effect is larger than the liquidity effect.

73) When the growth rate of the money supply decreases, interest rates end up being

permanently lower if

A) the liquidity effect is larger than the other effects.

B) there is fast adjustment of expected inflation.

C) there is slow adjustment of expected inflation.

D) the expected inflation effect is larger than the liquidity effect.

74) When the growth rate of the money supply is decreased, interest rates will rise immediately

if the liquidity effect is ________ than the other effects and if there is ________ adjustment of

expected inflation.

A) larger; rapid

B) larger; slow

C) smaller; slow

D) smaller; rapid

75) When the growth rate of the money supply is increased, interest rates will rise immediately if

the liquidity effect is ________ than the other effects and if there is ________ adjustment of

expected inflation.

A) larger; rapid

B) larger; slow

C) smaller; slow

D) smaller; rapid

76) If the Fed wants to permanently lower interest rates, then it should lower the rate of money

growth if

A) there is fast adjustment of expected inflation.

B) there is slow adjustment of expected inflation.

C) the liquidity effect is smaller than the expected inflation effect.

D) the liquidity effect is larger than the other effects.

77) If the Fed wants to permanently lower interest rates, then it should raise the rate of money

growth if

A) there is fast adjustment of expected inflation.

B) there is slow adjustment of expected inflation.

C) the liquidity effect is smaller than the expected inflation effect.

D) the liquidity effect is larger than the other effects.

78) Milton Friedman contends that it is entirely possible that when the money supply rises,

interest rates may ________ if the ________ effect is more than offset by changes in income, the

price level, and expected inflation.

A) fall; liquidity

B) fall; risk

C) rise; liquidity

D) rise; risk

Figure 4.5

79) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure,

one can conclude that the liquidity effect is ________ than the expected inflation effect and

interest rates adjust ________ to changes in expected inflation.

A) smaller; quickly

B) larger; quickly

C) larger; slowly

D) smaller; slowly

80) Figure 4.5 illustrates the effect of an increased rate of money supply growth. From the figure,

one can conclude that the

A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in

expected inflation.

B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in

expected inflation.

C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in

expected inflation.

D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to

changes in expected inflation.

81) _______ is the total resources owned by an individual, including all assets.

A) Expected return

B) Wealth

C) Liquidity

D) Risk

82) A ________ prefers stock in a less risky asset than in a riskier asset.

A) risk preferrer

B) risk-averse person

C) risk lover

D) risk-favorable person

83) When the quantity of bonds demanded equals the quantity of bonds supplied, there is

A) excess supply.

B) excess demand.

C) a market equilibrium.

D) an asset market approach.

84) Determining asset prices using stocks of assets rather than flow is called

A) asset transformation.

B) expected return.

C) asset market approach.

D) market equilibrium.

85) What is the model whose equations are estimated using statistical procedures used in

forecasting interest rates called?

A) Econometric model

B) Liquidity preference framework

C) Market equilibrium

D) Fisher effect

86) As expected inflation increases for the coming year, we expected the price of gold to

________ due to a rightward shift the in ________ curve.

A) increase; demand

B) increase; supply

C) decrease; demand

D) decrease; supply

87) As expected inflation falls for the coming year, we expected the price of gold to ________

due to a leftward shift the in ________ curve.

A) increase; demand

B) increase; supply

C) decrease; demand

D) decrease; supply

1) When interest rates decrease, the demand curve for bonds shifts to the left.

2) When an economy grows out of a recession, normally the demand for bonds increases and the

supply of bonds increases.

3) When the federal government’s budget deficit decreases, the demand curve for bonds shifts to

the right.

4) Investors make their choices of which assets to hold by comparing the expected return,

liquidity, and risk of alternative assets.

5) A person who is risk averse prefers to hold assets that are more, not less, risky.

6) Interest rates are procyclical in that they tend to rise during business cycle expansions and fall

during recessions.

7) When income and wealth are rising, the demand for bonds rises and the demand curve shifts

to the right.

8) An increase in the inflation rate will cause the demand curve for bonds to shift to the right.

9) The Fisher Effect predicts that an increase in expected inflation will lower the interest rate on

bonds.

10) An increase in the federal government budget deficit will raise the interest rate on bonds.

11) Holding everything else constant, an increase in wealth lowers the quantity demanded of an

asset.

12) An increase in an asset’s expected return relative to that of an alternative asset, holding

everything else unchanged, raises the quantity demanded of the asset.

13) The more liquid an asset is relative to alternative assets, holding everything else unchanged,

the more desirable it is, and the greater the quantity demanded.

14) A movement along the demand (or supply) curve occurs when the quantity demanded (or

supplied) changes at each given price (or interest rate) of the bond in response to a change in

some other factor besides the bond’s price or interest rate.

1) Identify and explain the four factors that influence asset demand. Which of these factors affect

total asset demand and which influence investors to demand one asset over another?

Topic: Chapter 4.1 Determining Asset Demand