Question 1

-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 2

-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 3

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 4

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 5

-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 6

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 smaller than the other effects, and the adjustment to expected inflation is slow, then the interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. This is because as the money supply increases, the demand for money decreases, causing the interest rate to fall in the short run. However, as inflation expectations adjust, lenders will demand higher interest rates to compensate for the decrease in the purchasing power of the money they lend out, causing the interest rate to eventually rise above the initial level.

Question 7

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 8

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 9

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 the money supply increases, interest rates may initially fall due to an increased supply of money. This is known as the liquidity effect. If the liquidity effect is larger than the other effects (including the expected inflation effect), interest rates will remain permanently lower.

Question 10

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 11

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

An increase in the money supply leads to a decrease in interest rates due to an increase in liquidity in the market. This is known as the liquidity effect, which is the initial effect. The income effect refers to the effect of interest rate change on a person's income, the price level effect refers to the effect of interest rate change on the overall price level, and the expected inflation effect refers to the effect of expected inflation on interest rates.

Question 12

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 13

-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

The answer of 
-In the figure above,one factor NOT responsible...

Question 14

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

Question 15

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 16

-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

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

Question 17

-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 18

-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 19

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

The term "liquidity effect" was coined by economist Milton Friedman to describe the impact of increased money supply on interest rates. As the supply of money increases, there is excess liquidity in the market, and lenders will lower interest rates to encourage borrowers to take on more loans. This decrease in interest rates is what Friedman referred to as the liquidity effect.

Question 20

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.

Quiz 5: The Behavior of Interest Rates

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

-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,show what happens to interest rates during a business cycle recession.

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

-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 slow,then the

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.

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.

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

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

Of the four effects on interest rates from an increase in the money supply,the initial effect is,generally,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,one factor NOT responsible for the decline in the demand for money is

-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

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

-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

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

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

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