Lecture 14

Question 1

Other things being equal, bond prices

A) vary inversely with interest rates.
B) vary proportionally with interest rates.
C) are unaffected by interest-rate changes.
D) are unaffected by changes in the demand for money.
E) vary directly with interest rates.

Answer 1

A) vary inversely with interest rates.

Question 2

Consider the demand for money. If real GDP falls, other things being equal, we can expect

A) an increase in precautionary demand for money.
B) a decrease in transactions demand for money.
C) an increase in the speculative demand for money.
D) an increase in the total demand for money.
E) an increase in transactions demand for money.

Answer 2

B) a decrease in transactions demand for money.

Question 3

If there are just two assets, bonds and money, then an excess demand for money implies

A) an excess supply of bonds.
B) equilibrium in the bond market.
C) nothing about conditions of demand for the other financial asset.
D) an indeterminate equilibrium in the bond market.
E) an excess demand for bonds.

Answer 3

A) an excess supply of bonds.

Question 4

If a person is holding money for the purchase of goods and services, this demand for money is known as

A) speculative demand.
B) nominal balance demand.
C) real balance demand.
D) transactions demand.
E) precautionary demand.

Answer 4

D) transactions demand.

Question 5

Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that

A) the price of the bond will rise further.
B) the face value of the bond will be adjusted to a lower value.
C) the relatively high demand for the bond will cause its present value to rise.
D) the lack of demand for this bond will cause its price to fall.
E) the face value of the bond will be adjusted to a lower value.

Answer 5

D) the lack of demand for this bond will cause its price to fall.

Question 6

When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls,

A) the present value of the asset will fall.
B) the current value of the asset will fall.
C) the future value of the asset will rise.
D) the present value of the asset will rise.
E) the present value of the asset is unaffected.

Answer 6

D) the present value of the asset will rise.

Question 7

If the annual interest rate is 8%, an asset that promises to pay $160 after each of the next two years has a present value of

A) $320.00.
B) $285.32.
C) $300.00.
D) $296.30.
E) $178.32.

Answer 7

B) $285.32.

Question 8

The opportunity cost of holding money rather than bonds is

A) forgone consumption.
B) the price level.
C) the rate of interest earned on bonds.
D) forgone liquidity.
E) zero — there is no opportunity cost of holding money.

Answer 8

C) the rate of interest earned on bonds.

Question 9

What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10% per year?

A) $133.10
B) $221.00
C) $100.00
D) $121.00
E) $110.00

Answer 9

E) $110.00

Question 10

If the general price level were to increase, other things being equal, the money demand function would

A) shift, but the direction of the shift cannot be predicted.
B) shift to the right.
C) shift to the left.
D) not be affected.
E) become steeper but not shift.

Answer 10

B) shift to the right.

Question 11

If the economy is currently in monetary equilibrium, an increase in the money supply will

A) cause an excess demand for money and a decrease in the rate of interest.
B) cause an increase in the demand for money, leading to a lower rate of interest.
C) lead to a movement down the money demand curve to a lower rate of interest.
D) not change the equilibrium conditions.
E) cause a reduction in the demand for money, leading to a higher rate of interest.

Answer 11

C) lead to a movement down the money demand curve to a lower rate of interest.

Question 12

When the market price of a bond falls, ceteris paribus, then

A) the market interest rate rises.
B) the yield on that bond also falls.
C) the yield on that bond rises.
D) the term to maturity of the bond decreases.
E) the term to maturity of the bond increases.

Answer 12

C) the yield on that bond rises.

Question 13

Other things being equal, a reduction in the money supply will lead to a

A) rise in the rate of interest and in increase in desired investment expenditure.
B) fall in the rate of interest and a decrease in desired investment expenditure.
C) rise in the rate of interest and a decrease in desired investment expenditure.
D) fall in the rate of interest and an increase in desired investment expenditure.
E) rise in the rate of interest and no change in desired investment expenditure.

Answer 13

C) rise in the rate of interest and a decrease in desired investment expenditure.

Question 14

A decrease in the money supply is most likely to

A) lower interest rates, investment, and aggregate expenditures.
B) raise interest rates, lower investment, and lower aggregate expenditures.
C) lower interest rates, raise investment, and raise aggregate expenditures.
D) raise interest rates, investment, and aggregate expenditures.
E) raise interest rates and investment, and lower aggregate expenditures.

Answer 14

B) raise interest rates, lower investment, and lower aggregate expenditures.

Question 15

If the annual interest rate is 3%, $10 000 received today has the same present value as ________ received one year from now.

A) $300
B) $9707.74
C) $10 000
D) $10 300
E) $13 000

Answer 15

D) $10 300

Question 16

An increase in the money supply sets the monetary transmission mechanism in motion which results in

A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
B) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
C) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.
D) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.
E) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve.

Answer 16

D) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve.

Question 17

If Robert expects interest rates to fall in the near future, he will probably be willing to

A) buy bonds now, but only if their price falls.
B) maintain only the current holding of bonds.
C) put his money under his mattress rather than buy bonds.
D) sell bonds now, and hold less money.
E) buy bonds now, and hold less money.

Answer 17

E) buy bonds now, and hold less money.

Question 18

When the price level increases, ceteris paribus, it causes households and firms to try to

A) reduce money balances, which drives national income up.
B) increase money balances, which drives interest rates down.
C) reduce money balances, which drives interest rates down.
D) increase money balances, which drives interest rates up.
E) reduce money balances, which drives interest rates up.

Answer 18

D) increase money balances, which drives interest rates up.

Question 19

The “precautionary demand” for money arises from the

A) uncertainty about when some expenditures will be necessary.
B) need to make predictable purchases of goods and services.
C) fear that interest rates will rise.
D) fear that interest rates will fall.
E) desire to avoid paying interest on credit purchases.

Answer 19

A) uncertainty about when some expenditures will be necessary.

Question 20

Speculative demand for money arises from the desire by individuals and firms to hold cash balances

A) to maintain adequate cash flow in case of inflation.
B) in anticipation of changes in interest rates and bond prices.
C) for speculative equity purchases.
D) in anticipation of investing in capital purchases for the firm.
E) to meet unforeseen business expenses.

Answer 20

B) in anticipation of changes in interest rates and bond prices.

Question 21

If the current market price of a bond is less than the present value of the income stream the bond will produce, the price will ________ due to excess ________ of/for the bond.

A) rise; demand
B) fall; demand
C) fall; supply
D) rise; supply

Answer 21

A) rise; demand

Question 22

Consider the demand for money curve. As we move up and to the left along the curve, the opportunity cost of holding money

A) is declining, so households and firms increase their desired money holdings.
B) is declining, so households and firms decrease their desired money holdings.
C) is increasing, so households and firms decrease their desired money holdings.
D) is increasing, so households and firms increase their desired money holdings.

Answer 22

C) is increasing, so households and firms decrease their desired money holdings.