Question 1

Money demanded for transactions and precautionary purposes is dependent upon the level of and changes in interest rates.

Accepted Answer

Money demanded for transactions and precautionary purposes is primarily dependent on the level of income and the general economic activity, not directly on interest rates. Interest rates more directly affect the speculative demand for money.

Question 2

At low rates of interest less money is normally demanded in the economy because most investors feel bond prices must eventually rise.

Accepted Answer

At low rates of interest, more money is normally demanded in the economy because borrowing costs are lower, making loans more attractive for investment and spending, not because investors feel bond prices must eventually rise.

Question 3

In the liquidity preference theory the nation's money supply is assumed to be interest inelastic.

Accepted Answer

The liquidity preference theory, proposed by John Maynard Keynes, suggests that the money supply is fixed and does not change with interest rates, making it interest inelastic.

Question 4

The act of increased hoarding of money by the public will result in lower interest rates, other factors held constant.

Accepted Answer

Increased hoarding of money by the public reduces the amount of money available for lending, which can lead to higher interest rates as the supply of loanable funds decreases.

Question 5

Dishoarding of money leads to higher interest rates, ceteris paribus.

Accepted Answer

Dishoarding of money increases the supply of money available for lending, which typically leads to lower interest rates, not higher, as lenders have more funds to offer.

Question 6

Contraction of a nation's money supply by its central bank will, ceteris paribus, result in higher interest rates.

Accepted Answer

When a central bank contracts the money supply, it reduces the amount of money available for borrowing, which typically leads to higher interest rates as the cost of borrowing money increases.

Question 7

Expansion of the money supply by the central bank should lower interest rates provided the demand for money does not fall; if the demand for money does decline, interest rates will rise.

Accepted Answer

Expansion of the money supply by the central bank typically lowers interest rates because more money available means banks can lend more easily at lower rates. If the demand for money declines, it doesn't automatically lead to higher interest rates; it could further lower them since less demand for money means less competition for borrowing, potentially pushing rates down further.

Question 8

The liquidity preference theory of interest is essentially a long run, not a short run, theory of interest rate determination.

Accepted Answer

The liquidity preference theory of interest, proposed by John Maynard Keynes, is primarily a short-run theory of interest rate determination, focusing on the demand for money and the supply of money in the economy.

Question 9

In the loanable funds theory of interest consumer demand for credit is assumed to be relatively elastic with respect to changes in the rate of interest.

Accepted Answer

The answer of In the loanable funds theory of interest...

Question 10

In the loanable funds theory the demand for loanable funds in the business sector falls as interest rates increase.

Accepted Answer

In the loanable funds theory, the demand for loanable funds by businesses decreases as interest rates increase because higher interest rates make borrowing more expensive, thus reducing the incentive for businesses to take out loans for investment purposes.

Question 11

According to the income effect, a rise in interest rates may cause individuals to save more in an effort to reach their savings goal more rapidly.

Accepted Answer

The income effect suggests that a rise in interest rates may cause individuals to save less because they can achieve their savings goals with less saving due to higher returns on their savings.

Question 12

For an individual or family heavily in debt a rise in interest rates will stimulate a greater amount of savings because of the wealth effect.

Accepted Answer

A rise in interest rates increases the cost of borrowing, making it more expensive for individuals or families already in debt to pay off their loans or take on new debt, rather than stimulating savings.

Question 13

In the loanable funds theory of interest, the supply of savings curve is assumed to be highly interest elastic.

Accepted Answer

The answer of In the loanable funds theory of interest,...

Question 14

Positive hoarding of money takes place when the demand for money is less than the supply.

Accepted Answer

Positive hoarding of money occurs when the demand for money exceeds the supply, leading individuals to hold onto cash rather than spend it.

Question 15

Changes in net investment by business are closely linked to fluctuations in a nation's output of goods and services, employment and prices. In fact, substantial cutbacks in inventory investment and long-term capital spending occur on average every 3 to 4 years in the U.S., usually precipitating a period of inflation.

Accepted Answer

Changes in net investment by businesses do indeed affect a nation's output, employment, and prices, but substantial cutbacks in inventory investment and long-term capital spending typically precede economic downturns or recessions, not periods of inflation. Inflation can be a consequence of various factors, including excessive demand, but the direct link as stated is inaccurate.

Question 16

The Classical theorists believed that the demand for investment capital is negatively related to the rate of interest: when interest rates are low, more funds are required while higher interest rates decrease the demand for investment capital.

Accepted Answer

Classical theorists posited that the demand for investment capital is inversely related to the interest rate. This means that as interest rates decrease, the cost of borrowing becomes cheaper, encouraging more investment. Conversely, higher interest rates make borrowing more expensive, thus reducing the demand for investment capital.

Question 17

The Classical theory of interest assumes that interest rates are the principal determinant of the quantity of savings and that the demand for borrowed funds comes primarily from consumers and government.

Accepted Answer

The Classical theory of interest, primarily associated with economists like Irving Fisher, posits that interest rates are determined by the supply of savings and the demand for investment funds, not primarily from consumers and government but from businesses looking to invest in capital goods.

Question 18

According to the Liquidity Preference theory of interest, at a point above the equilibrium rate of interest, the supply of money exceeds the quantity demanded and some households, businesses and units of government will try to dispose of unwanted money balances by purchasing bonds.

Accepted Answer

According to the Liquidity Preference Theory, proposed by John Maynard Keynes, interest rates adjust to balance the supply and demand for money. At a point above the equilibrium interest rate, the supply of money indeed exceeds the demand. As a result, entities holding excess money balances will seek to invest in bonds or other assets, thereby driving down the interest rate towards equilibrium.

Question 19

The pure or risk-free rate of interest is a component of all interest rates in the economy. The closest approximation of this in the real world is the yield to maturity on U.S. Treasury bills.

Accepted Answer

The answer of The pure or risk-free rate of interest...

Question 20

According to the liquidity effect, an increase in the nation's money supply with money demand unchanged would cause interest rates to rise due to increased inflation.

Accepted Answer

The liquidity effect suggests that an increase in the money supply, with money demand unchanged, would initially lower interest rates due to the increased availability of liquidity or cash in the economy.

Quiz 5: Understanding Interest Rates, Savings, and the Wealth Effect