Question 1

-In the figure above,the factor responsible for the decline in the interest rate is
A)a decline the price level.
B)a decline in income.
C)an increase in the money supply.
D)a decline in the expected inflation rate.

Accepted Answer

An increase in the money supply typically leads to a decline in interest rates because more money available means banks can lend more easily, reducing the cost of borrowing.

Question 2

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the
A)interest rate will fall.
B)interest rate will rise.
C)interest rate will fall immediately below the initial level when the money supply grows.
D)interest rate will rise immediately above the initial level when the money supply grows.

Accepted Answer

The answer of If the liquidity effect is smaller than...

Question 3

In the liquidity preference framework,a one-time increase in the money supply results in a price level effect.The maximum impact of the price level effect on interest rates occurs
A)at the moment the price level hits its peak (stops rising)because both the price level and expected inflation effects are at work.
B)immediately after the price level begins to rise,because both the price level and expected inflation effects are at work.
C)at the moment the expected inflation rate hits its peak.
D)at the moment the inflation rate hits it peak.

Accepted Answer

The maximum impact on interest rates in the liquidity preference framework occurs at the moment the price level hits its peak because at this point, both the direct effect of the price level on interest rates and the expectations of future inflation are influencing interest rates. The direct effect comes from the increased money supply leading to higher prices, and the expectation effect comes from people anticipating further inflation, both of which work together to influence interest rates most strongly at this point.

Question 4

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by
A)a decrease in money growth.
B)a decline in the expected price level.
C)an increase in income.
D)an increase in the expected price level.

Accepted Answer

The answer of 
-In the figure above,the decrease in the...

Question 5

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.
A)larger;fast
B)larger;slow
C)smaller;slow
D)smaller;fast

Accepted Answer

The liquidity effect suggests that an increase in the money supply will initially lower interest rates. If the liquidity effect is larger than other effects (such as the income and price expectations effects) and there is slow adjustment of expected inflation, interest rates will fall immediately. Fast adjustment of expected inflation would counteract the liquidity effect by increasing interest rates in anticipation of inflation.

Question 6

Of the four effects on interest rates from an increase in the money supply,the initial effect is,generally,the
A)income effect.
B)liquidity effect.
C)price level effect.
D)expected inflation effect.

Accepted Answer

The initial effect of an increase in the money supply is the liquidity effect, which causes interest rates to decrease. The income effect, price level effect, and expected inflation effect are all subsequent effects that may also impact interest rates, but they do not occur initially.

Question 7

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

Accepted Answer

The answer of Using the liquidity preference framework,show what happens...

Question 8

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.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.

Accepted Answer

The liquidity effect, which suggests that an increase in the money supply will initially lower interest rates, appears to dominate initially after T0, as indicated by the initial decrease in interest rates. This is followed by a slower adjustment of interest rates to changes in expected inflation, consistent with the description in choice A.

Question 9

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.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.

Accepted Answer

The answer of 
-In the figure above,illustrates the effect of...

Question 10

Of the four effects on interest rates from an increase in the money supply,the one that works in the opposite direction of the other three is the
A)liquidity effect.
B)income effect.
C)price level effect.
D)expected inflation effect.

Accepted Answer

The liquidity effect of an increase in the money supply tends to lower interest rates because more money available means cheaper borrowing costs. This effect works in the opposite direction of the income effect, price level effect, and expected inflation effect, which all tend to increase interest rates due to higher demand for goods, higher prices, and expectations of future inflation, respectively.

Question 11

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.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.

Accepted Answer

From the figure, we can see that an increased rate of money supply growth at T0 leads to an increase in expected inflation and a decrease in real interest rates. This is the liquidity effect. However, the increase in expected inflation also leads to an increase in nominal interest rates, which partially offsets the decrease in real interest rates. This is the expected inflation effect. The net effect is a decrease in real interest rates that is smaller than the liquidity effect alone. Additionally, interest rates adjust slowly to changes in expected inflation, as shown by the slow increase in nominal interest rates. Therefore, C is the best choice.

Question 12

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.
A)liquidity
B)price level
C)expected-inflation
D)income

Accepted Answer

Milton Friedman referred to the response of lower interest rates resulting from an increase in the money supply as the liquidity effect. This is because the increase in the money supply leads to excess liquidity in the market, which drives down interest rates. This, in turn, encourages more borrowing and investment, which helps stimulate economic growth.

Question 13

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.

Accepted Answer

When the Fed wants to permanently lower interest rates, raising the rate of money growth can be effective if the liquidity effect (the immediate impact of an increase in the money supply leading to lower interest rates) is larger than the other effects, such as the expected inflation effect. This is because the initial decrease in interest rates due to the liquidity effect can outweigh the potential increase in interest rates that might come from higher expected inflation, at least in the short term. Over time, as expectations adjust, the lower interest rates can become more entrenched.

Question 14

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.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.

Accepted Answer

The answer of 
-In the figure above,illustrates the effect of...

Question 15

Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?

Accepted Answer

The answer of Using the liquidity preference framework,what will happen...

Question 16

It is 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

Accepted Answer

The answer of It is possible that when the money...

Question 17

If the liquidity effect is smaller than the other effects,and the adjustment to 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.

Accepted Answer

If the liquidity effect is small, it means that changes in the money supply will have a smaller impact on interest rates. However, if the adjustment to expected inflation is slow, it will eventually catch up, causing interest rates to initially fall but eventually climb above the initial level in response to an increase in money growth.

Question 18

-In the figure above,one factor NOT responsible for the decline in the demand for money is
A)a decline the price level.
B)a decline in income.
C)an increase in income.
D)a decline in the expected inflation rate.

Accepted Answer

An increase in income typically leads to an increase in the demand for money, as people have more money to spend and hold.

Question 19

-In the figure above,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)an increase in income.

Accepted Answer

The answer of 
-In the figure above,the decrease in the...

Question 20

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.

Accepted Answer

When the growth rate of money supply increases, it leads to an increase in liquidity in the market which in turn lowers interest rates. However, if the liquidity effect is larger than the other effects such as the expected inflation effect, the interest rates will remain lower permanently.

Quiz 5: The Behavior of Interest Rates

-In the figure above,the factor responsible for the decline in the interest rate is

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is immediate,then the

In the liquidity preference framework,a one-time increase in the money supply results in a price level effect.The maximum impact of the price level effect on interest rates occurs

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by

When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is than the other money supply effects and there is adjustment of expected inflation.

Of the four effects on interest rates from an increase in the money supply,the initial effect is,generally,the

Using the liquidity preference framework,show what happens to interest rates during a business cycle recession.

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

Of the four effects on interest rates from an increase in the money supply,the one that works in the opposite direction of the other three is the

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0.From the figure,one can conclude that the

Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.

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

-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0.From the figure,one can conclude that the

Using the liquidity preference framework,what will happen to interest rates if the Fed increases the money supply?

It is 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.

If the liquidity effect is smaller than the other effects,and the adjustment to expected inflation is slow,then the

-In the figure above,one factor NOT responsible for the decline in the demand for money is

-In the figure above,the decrease in the interest rate from i1 to i2 can be explained by

When the growth rate of the money supply increases,interest rates end up being permanently lower if