Principles of Macroeconomics Version 3 0 3rd Edition Rittenberg Test Bank

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Chapter 10: Financial Markets and the Economy
Multiple Choice
1. Financial markets are

A) markets where money is traded between the Fed and economic agents.
B) markets where funds accumulated by one group are made available to another group.
C) banks interact to lend and borrow reserves.
D) the market where capital goods are traded.
Ans: B
Difficulty: Easy
2. Since the late 1970s, the United States

A) has experienced only moderate inflation, usually between 2 to 3 percent.
B) has seen a steadily increasing rate of inflation.
C) has experienced low inflation, except for a seven-year period between 1979 and 1986.
D) has experienced high inflation followed by a long period of deflation.
Ans: C
Difficulty: Easy
3. A buyer of a newly-issued bond

A) is a borrower of funds.
B) is a lender of funds.
C) is purchasing ownership in the institution that issues the bonds.
D) must be a producer and not a consumer.
Ans: B
Difficulty: Easy
4. A bond is
A) a debt instrument, that is, the issuer has taken out a loan.
B) an equity instrument, that is, the buyer has purchased ownership in the issuer’s firm.
C) the same thing as a stock.
D) a short-term loan from the government.
Ans: A
Difficulty: Easy
5. The face value of a bond is

A) the price an individual pays to purchase the bond.
B) the amount that the issuer will have to pay upon maturity.
C) the market value of the bond.
D) the rate of return on the bond.
Ans: B
Difficulty: Easy
6. The interest rate on a bond is

A) the difference between the face value and the bond price, expressed as a percentage of the face
value.
B) the difference between the face value and the bond price, expressed as a percentage of the bond
price.
C) the ratio of the face value and the bond price, expressed as a percentage.
D) the difference between the face value and the yield, expressed as a percentage of the bond price.
Ans: B
Difficulty: Easy
7. Suppose you sell a $1,000 bond that matures in 1 year for $950. Calculate the interest rate you will
have to pay on this bond.
A) 0.95%
B) 5.0%
C) 5.3%
D) 95%
Ans: C
Difficulty: Medium
8. Suppose you buy a bond with a face value of $1,000 for $800. What is the interest rate you receive
on the bond?
A) 0.8%
B) 1.25%
C) 20%
D) 25%
Ans: D
Difficulty: Medium

9. Which of the following is true with regard to bonds?
A) As the price of a bond falls, the interest rates rises.
B) As the price of a bond rises, the interest rates rises.
C) As the price of a bond falls, the interest rates remains unchanged.
D) As the price of a bond falls, the interest rates falls.
Ans: A
Difficulty: Medium
10. The price of a bond is determined by

A) the seller.
B) the buyer.
C) the demand for and supply of bonds.
D) the investment bank that auctions off the bonds.
Ans: C
Difficulty: Medium
11. Which of the following statements is true?

A) The lower the price of a bond, relative to its face value, the lower the interest rate.
B) The lower the price of a bond, relative to its maturity, the lower the interest rate.
C) The higher the price of a bond, relative to its face value, the higher the interest rate.
D) The lower the price of a bond, relative to its face value, the higher the interest rate.
Ans: D
Difficulty: Medium
12. A $100 bond, which matures in one year, has a price of $75. The interest rate on this bond is
A) 20%.
B) 25%.
C) 33 1/3%.
D) 50%.
Ans: C
Difficulty: Medium
13. A $1,000 bond, which matures in one year, has a price of $925. The interest rate on this bond is
A) 7.5%.
B) 8.11%.
C) 9.25%.
D) 9.20%.
Ans: B
Difficulty: Medium
14. Which of the following statements is true about bonds?

A) Sellers of newly issued bonds are borrowers.
B) When the government and large corporations want to borrow money they buy bonds.
C) A bond owner must hold a bond until it matures.
D) The interest rate on a bond is directly related to its price.
Ans: A
Difficulty: Medium
15. Which of the following statements is true about bonds?

A) Buyers of newly issued bonds are borrowers.
B) When the government and large corporations want to borrow money they buy bonds.
C) A bond owner must hold a bond until it matures.
D) The interest rate on a bond is inversely related to its price.
Ans: D
Difficulty: Medium
16. The interest rate on a bond is

A) inversely related to its price.
B) directly related to its price.
C) determined by its face value.
D) determined by the time to maturity.
Ans: A
Difficulty: Medium
17. The demand for bonds curve slopes downwards because

A) at higher prices, bonds pay higher interest which makes them more attractive to buyers.
B) lower prices reduce the cost of borrowing which makes them less attractive to buyers.
C) at lower prices, bonds pay higher interest which makes them more attractive to buyers.
D) higher prices raise the cost of borrowing which makes them less attractive to buyers.
Ans: C
Difficulty: Medium
18. The supply of bonds curve slopes upwards because

A) at higher prices, bonds pay higher interest which makes them more attractive to suppliers.
B) lower prices raises the cost of borrowing which makes them less attractive to suppliers.
C) at lower prices, bonds pay higher interest which makes them more attractive to suppliers.
D) higher prices raise the cost of borrowing which makes them less attractive to suppliers.
Ans: B
Difficulty: Medium
19. All else constant, an increase in the demand for bonds

A) increases the equilibrium quantity and the equilibrium price of bonds.
B) increases the equilibrium quantity and decreases the equilibrium price of bonds.
C) decreases the equilibrium quantity and increases the equilibrium price of bonds.
D) decreases the equilibrium quantity and the equilibrium price of bonds.
Ans: A
Difficulty: Medium
20. All else constant, an increase in the supply of

A) increases the equilibrium quantity and the equilibrium price of bonds.
B) increases the equilibrium quantity and decreases the equilibrium price of bonds.
C) decreases the equilibrium quantity and increases the equilibrium price of bonds.
D) decreases the equilibrium quantity and the equilibrium price of bonds.
Ans: B
Difficulty: Medium
21. An increase in the demand for bonds

A) raises the interest rate and increases equilibrium quantity of bonds.
B) raises the interest rate and decreases equilibrium quantity of bonds.
C) lowers the interest rate and decreases equilibrium quantity of bonds.
D) lowers the interest rate and increases equilibrium quantity of bonds.
Ans: D
Difficulty: Medium
22. An increase in the supply of bonds

A) raises the interest rate and increases equilibrium quantity of bonds.
B) raises the interest rate and decreases equilibrium quantity of bonds.
C) lowers the interest rate and decreases equilibrium quantity of bonds.
D) lowers the interest rate and increases equilibrium quantity of bonds.
Ans: A
Difficulty: Medium
23. Which of the following statements is true? All other things unchanged,
A) when bond prices rise, real GDP and the price level rise.
B) when bond prices fall, real GDP rises and the price level falls.
C) when bond prices rise, the interest rate rises, and aggregate demand and the price level fall.
D) when bond prices fall, the interest rate and aggregate demand fall.
Ans: A
Difficulty: Difficult
Figure 10-1

24. Refer to Figure 10-1. Given a face value of $1,000, a price of $900, and quantity of Q1, the
interest rate on the bond is
A) 1.11%.
B) 10.0%.
C) 11.1%.
D) 17.6%.
Ans: C
Difficulty: Medium
25. Refer to Figure 10-1. A movement from S1 to S2, means there was
A) a decrease in borrowing.
B) an increase in borrowing.
C) a decrease in lending.
D) a decrease in the interest rate.
Ans: B
Difficulty: Medium
26. Refer to Figure 10-1. Following the increase in supply from S1 to S2, at a price of $850, what is
the interest rate?
A) 6.6%
B) 15%
C) 17.6%
D) 23.5%
Ans: C
Difficulty: Medium
27. If bond prices rise,

A) interest rates rise, which in turn, discourage investment.
B) interest rates fall, which in turn, discourage investment.
C) interest rates rise, which in turn, stimulate investment.
D) interest rates fall, which in turn, stimulate investment.
Ans: D
Difficulty: Medium
28. If bond prices fall,

A) interest rates rise, which in turn, discourage investment.
B) interest rates fall, which in turn, discourage investment.
C) interest rates rise, which in turn, stimulate investment.
D) interest rates fall, which in turn, stimulate investment.
Ans: A
Difficulty: Medium
29. An increase in the demand for bonds leads to

A) a decrease in the price of bonds, a decrease in the interest rate, and a decrease in aggregate demand.
B) an increase in the price of bonds, an increase in the interest rate, and an increase in aggregate
demand.
C) an increase in the price of bonds, a decrease in the interest rate, and an increase in aggregate
demand.
D) a decrease in the price of bonds, an increase in the interest rate, and an increase in aggregate
demand.
Ans: C
Difficulty: Medium
30. An increase in the supply of bonds leads to

A) an increase in the price of bonds, a decrease in the interest rate, and an increase in aggregate
demand.
B) an increase in the price of bonds, an increase in the interest rate, and an increase in aggregate
demand.
C) a decrease in the price of bonds, an increase in the interest rate, and an increase in aggregate
demand.
D) a decrease in the price of bonds, an increase in the interest rate, and a decrease in aggregate
demand.
Ans: D
Difficulty: Medium
31. Suppose the government issues bonds to finance an increase in government spending. In the bond
market,
A) the demand curve shifts right, leading to an increase in bond prices, and a decrease in interest
rates.
B) the supply curve shifts right, leading to a decrease in bond prices, and an increase in interest rates.
C) the demand curve shifts left, leading to a decrease in bond prices, and an increase in interest rates.
D) the supply curve shifts left, leading to an increase in bond prices, and an increase in interest rates.
Ans: B
Difficulty: Medium
32. A country's exchange rate is the

A) price of its currency in terms of another currency.
B) ratio of imports to exports.
C) ratio of exports to imports.
D) ratio of net exports to real GDP.
Ans: A
Difficulty: Easy
33. Currency rates of exchange are determined by

A) agreements among governments.
B) the nations with the strongest armies.
C) the demand and supply of the currency.
D) multilateral business agreements.
Ans: C
Difficulty: Easy
34. Which of the following events is likely to generate a demand for U.S. dollars in the foreign
exchange market?
A) A Saudi Arabian citizen buys a condominium in New York.
B) An American student will begin her first year of college at Oxford, England.
C) Wal-Mart imports 5,000 bicycles from China to sell in its stores.
D) The Illinois Chamber of Commerce will finance and lead a trade mission to India.
Ans: A
Difficulty: Medium

35. Which of the following events is likely to generate a supply of U.S. dollars in the foreign
exchange market?
A) A Saudi Arabian citizen buys a condominium in New York.
B) An American student will pay her way to attend her first year of college at Oxford, England.
C) Alabama Mills exports 5,000 bales of cotton to Pakistan.
D) Hans Meyer, a German citizen, plans to spend a month in California, sampling wines.
Ans: B
Difficulty: Medium
36. If a British student pays her way to attend Harvard University, her action will:
A) cause the exchange rate of the British pound to rise.
B) cause the exchange rate of the U.S. dollar to fall.
C) change the supply of dollars in the foreign currency market.
D) change the supply of pounds in the foreign currency market.
Ans: D
Difficulty: Medium
37. Which of the following is an index of exchange rates?

A) import-export ratio
B) trade-weighted exchange rate
C) trade balance index
D) foreign price-domestic price ratio
Ans: B
Difficulty: Easy
38. The foreign exchange market

A) is a government-run market where foreign currencies are traded.
B) is a bank-owned market through which people buy and sell currencies.
C) refers to the entire array of institutions through which people buy and sell currencies.
D) an open market run by the Federal Reserve through which banks buy and sell currencies.
Ans: C
Difficulty: Easy
39. A higher exchange rate for the U.S. dollar means that
A) the U.S. dollar trades for less foreign currency.
B ) the U.S. dollar trades for more foreign currency.
C) foreign currency has risen in value relative to the dollar.
D) the U.S. dollar has fallen in value relative to the foreign currency.
Ans: B
Difficulty: Medium
40. Suppose the United States experiences a rise in the U.S. dollar price of foreign exchange.
A) This means that the U.S. exchange rate has risen and the U.S. dollar buys more foreign currency.
B) This means that the U.S. exchange rate has risen and the U.S. dollar buys less foreign currency.
C) This means that the U.S. exchange rate has fallen and the U.S. dollar buys more foreign currency.
D) This means that the U.S. exchange rate has fallen and the U.S. dollar buys less foreign currency.
Ans: D
Difficulty: Medium
41. Suppose the U.S. dollar price of the Euro falls. This means that
A) the U.S. exchange rate has risen and the U.S. dollar buys more euros.
B) the U.S. exchange rate has risen and the U.S. dollar buys less euros
C) the U.S. exchange rate has fallen and the U.S. dollar buys more euros.
D) the U.S. exchange rate has fallen and the U.S. dollar buys less euros.
Ans: A
Difficulty: Medium
42. A higher U.S. exchange rate means that

A) foreign products are now more expensive to U.S. citizens.
B) foreign products are now cheaper to U.S. citizens.
C) U.S. products are now more expensive to U.S. citizens.
D) U.S. products are now cheaper to foreign countries.
Ans: B
Difficulty: Medium
43. If the U.S. exchange rate falls,

A) foreign products are now more expensive toforeigners.
B) foreign products are now cheaper to U.S. citizens.
C) U.S. products are now more expensive to U.S. citizens.
D) U.S. products are now cheaper to foreign countries.
Ans: D
Difficulty: Medium

Figure 10-2
44. Refer to Figure 10-2. Who generates a demand for dollars in the foreign exchange market?
A) U.S. residents who demand foreign goods, services, and assets.
B) U.S. residents who demand domestically produced goods, services, and assets.
C) Foreign residents abroad who demand U.S. goods, services, and assets.
D) Foreign banks and citizens who wish to reduce their holdings of foreign currencies.
Ans: C
Difficulty: Medium
45. Refer to Figure 10-2. Who generates a supply of dollars in the foreign exchange market?
A) U.S. residents who demand foreign goods, services, and assets.
B) U.S. residents and firms who wish to sell domestic assets to foreigners.
C) Foreign residents abroad who demand U.S. goods, services, and assets.
D) Foreign banks and citizens who wish to increase their holdings of a reserve currency.
Ans: A
Difficulty: Medium
46. Refer to Figure 10-2. The supply of dollars curve slopes upwards because
A) a higher exchange rate tends to make foreign goods and services more expensive for U.S.
buyers, thereby raising the price of foreign currency in the foreign exchange market.
B) a higher exchange rate tends to make foreign goods and services cheaper to U.S. buyers,
thereby generating a higher quantity of dollars in the foreign exchange market.
C) a lower exchange rate tends to decrease U.S. exports, thereby generating a lower quantity of
dollars in the foreign exchange market.
D) a lower exchange rate tends to increase U.S. imports, thereby raising the price of foreign
currency in the foreign exchange market.
Ans: B
Difficulty: Medium
47. Refer to Figure 10-2. The demand for dollars curve slopes downwards because

A) a higher exchange rate tends to make U.S. goods and services more expensive for foreigners,
thereby generating a lower quantity of dollars in the foreign exchange market.
B) a higher exchange rate tends to make U.S. goods and services cheaper for foreigners, thereby
generating a lower quantity of dollars in the foreign exchange market.
C) a lower exchange rate tends to decrease U.S. exports, which raises the price of foreign
D) a lower exchange rate tends to increase U.S. imports, thereby raising the price of foreign
Ans: A
Difficulty: Medium
48. An increase in the demand for bonds generates

A) an increase in both the interest rate and the exchange rate.
B) a decrease in both the interest rate and the exchange rate.
C) an increase in the interest rate and a decrease in the exchange rate.
D) a decrease in the interest rate and an increase in the exchange rate.
Ans: B
Difficulty: Medium
49. An increase in the supply of bonds generates

A) an increase in both the interest rate and the exchange rate.
B) a decrease in both the interest rate and the exchange rate.
C) an increase in the interest rate and a decrease in the exchange rate.
D) a decrease in the interest rate and an increase in the exchange rate.
Ans: A
Difficulty: Medium
50. Which of the following would cause the price of the dollar to rise?
A) a fall in bond prices
B) an increase in bond prices
C) a decrease in interest rates
D) a fall in the exchange rate
Ans: A
Difficulty: Hard
51. A fall in the price of bonds may lead to a(n):

A) decrease in aggregate demand and the price level due to a decrease in net exports.
B) decrease in aggregate demand and an increase in the price level due to a decrease in investment.
C) increase in aggregate demand due to an increase in net exports.
D) increase in aggregate demand due to an increase in investment.
Ans: A
Difficulty: Hard
52. If the supply of bonds in the United States decreases, bond prices will rise. When bond prices rise
interest rates will
A) fall, which will make U.S. financial assets more attractive to foreigners.
B) rise, which will make U.S. financial assets more attractive to foreigners.
C) fall, which will make U.S. financial assets less attractive to foreigners.
D) rise, which will make U.S. financial assets less attractive to foreigners.
Ans: C
Difficulty: Medium
53. Holding everything else unchanged, higher interest rates in the U.S.
A) increase the demand and reduce the supply of dollars leading to an increase in the exchange rate.
B) decrease the demand and the supply of dollars leading to an decrease in the exchange rate.
C) increase the demand and the supply of dollars leading to an increase in the exchange rate.
D) decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.
Ans: A
Difficulty: Medium
54. Holding everything else unchanged, higher interest rates in foreign countries relative to U.S.
interest rates
A) increase the demand and reduce the supply of dollars leading to an increase in the exchange rate.
B) decrease the demand and the supply of dollars leading to an decrease in the exchange rate.
C) increase the demand and the supply of dollars leading to an increase in the exchange rate.
D) decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.
Ans: D
Difficulty: Medium
55. If the demand for U. S. dollars goes down, the exchange rate will .
A) increase and, as a result, net exports in the United States will decrease.
B) decrease and, as a result, net exports in the United States will increase
C) increase and, as a result, net exports in the United States will increase
D) decrease and, as a result, net exports in the United States will decrease
Ans: B
Difficulty: Medium
56. If the demand for U.S. dollars goes up, the exchange rate will.
A) increase and, as a result, net exports in the United States will decrease.
B) decrease and, as a result, net exports in the United States will increase.
C) increase and, as a result, net exports in the United States will increase.
D) decrease and, as a result, net exports in the United States will decrease.
Ans: A
Difficulty: Medium

57. Higher interest rates in the United States will attract foreigners to U.S interest-earning assets. This
A) decreases U.S. net exports.
B) increases U.S. net exports.
C) decreases U.S. imports.
D) will have no effect on net exports.
Ans: A
Difficulty: Medium
58. An increase in the U.S. exchange rate will make U.S. exports.
A) less attractive to foreigners and imports from other countries less attractive to the United States.
B) less attractive to foreigners and imports from other countries more attractive to the United States.
C) more attractive to foreigners and imports from other countries more attractive to the United States.
D) more attractive to foreigners and imports from other countries less attractive to the United States.
Ans: B
Difficulty: Medium
59. An investor who felt that the U.S. and world economies were about to improve, would be likely to
A) avoid investing in U.S. treasury bonds because interest rates would soon fall causing bond prices to
rise.
B) avoid investing in U.S. treasury bonds because interest rates would soon rise causing bond prices to
fall.
C) invest in U.S. treasury bonds because interest rates would soon fall causing bond prices to rise.
D) invest in U.S. treasury bonds because interest rates would soon rise causing bond prices to fall.
Ans: B
Difficulty: Medium

60. In the textbook model, wealth is held in two forms: money and in bond funds. Which of the
following statements are true?
I. Money and bond funds earn the same interest rates in a well functioning money market.
II. Money is a more liquid asset compared to bond funds.
III. Bond funds are interest earning assets while money generally is not.
IV. The difference between the interest rates paid on money deposits and the interest return
available from bonds is the cost of holding money.
A) I, II, and IV
B) I and IV
C) II, III, and IV
D) III and IV
Ans: C
Difficulty: Medium
61. In deciding how much money to hold, individuals

A) must understand the velocity of the money and its role in the economy.
B) compare the inflation rate with the market interest rate.
C) base their decisions on what others are doing.
D) evaluate the relative costs and benefits of holding money versus other assets.
Ans: D
Difficulty: Medium
62. What are the three motives for holding money?

A) the medium of exchange motive, the store of value motive, and the unit of account motive
B) the transaction motive, the speculative motive, and the liquidity motive
C) the transaction motive, the investment motive, and the liquidity motive
D) the transaction motive, the speculative motive, and the precautionary motive
Ans: D
Difficulty: Easy
63. When people hold money to make anticipated purchases of goods and services, they are exercising
the _______ demand for money.
A) speculative
B) exchange
C) transactions
D) precautionary
Ans: C
Difficulty: Easy
64. Money held for contingencies reflects the _______ demand for money.
A) speculative
B) exchange
C) transactions
D) precautionary
Ans: D
Difficulty: Easy
65. The _______ demand for money is holding money in expectation that bond prices and the prices
of other assets might change.
A) speculative
B) exchange
C) transactions
D) precautionary
Ans: A
Difficulty: Easy
66. Holding $10 in your pocket to purchase a piping hot pizza illustrates the
A) speculative demand for money.
B) transfer demand for money.
C) precautionary demand for money.
D) transactions demand for money.
Ans: D
Difficulty: Medium
67. Keeping an extra $200 in your checking account to pay for possible car repairs illustrates the
Ans: C
Difficulty: Medium
68. Alexa keeps $500 readily accessible in her checking account so that she can take advantage of
changes in the prices of other financial assets. This illustrates the
Ans: A
Difficulty: Medium
69. Suppose you earn $4,800 a month and spend exactly $160 in each of the 30 days. If your entire
earnings are deposited in your checking account at the beginning of the month, then your average
quantity of money demanded is
A) $160.
B) $1,200.
C) $2,400.
D) $4,800.
Ans: C
Difficulty: Hard
70. Suppose you earn $4,800 a month and spend exactly $160 in each of the 30 days. If you deposit
$1, 600 into your checking account on the first day, eleventh day, and twenty-first day of the
month, then your average quantity of money demanded is
A) $800.
B) $1,200.
C) $2,400.
D) $4,800.
Ans: A
Difficulty: Hard
Scenario 1
Consider two money management strategies. The first strategy is called the cash strategy in which an
individual deposits her monthly earnings in a checking account and draws down equal amounts each
day to finance her daily expenditures. Assume that she earns no interest on her checking accounts and
funds are exhausted at the end of the month. The second strategy is called the bond fund strategy. Here
the individual deposits one-quarter of her earnings in a checking account and the remaining three-
quarters in a bond fund. The bond fund pays 1% interest per month. At the end of the week when the
money in the checking account is exhausted, the individual replenishes it by withdrawing another one-
quarter of her earnings from the bond fund for the next week. This process is repeated at the end of the
second week and third week until the bond fund is exhausted.
71. Refer to Scenario 1. In which strategy will the quantity of money demanded be greater?
A) the cash strategy
B) the bond fund strategy
C) It will be the same in either strategy.
D) There is insufficient information to answer the question.
Ans: A
Difficulty: Medium
72. Refer to Scenario 1. An individual is more likely to adopt the bond fund strategy when
A) the inflation rate falls.
B) the interest rate is higher.
C) the cost of transferring funds between interest earning assets and checkable deposits is high.
D) bond funds become less liquid.
Ans: B
Difficulty: Medium
73. Refer to Scenario 1. At low interest rates, an individual

A) is more likely to adopt the bond fund strategy.
B) might favor the simple cash strategy because the opportunity cost has increased.
C) might favor the simple cash strategy because the interest foregone is minimal.
D) might be indifferent between the two strategies because the cost of transferring funds between
interest earning assets and checkable deposits falls.
Ans: C
Difficulty: Medium
74. The opportunity cost of holding money is

A) the liquidity foregone.
B) the higher interest rates that can be earned by holding a bond fund.
C) the decrease in risk from holding money rather than a bond fund.
D) the liquidity gained by holding ready cash.
Ans: B
Difficulty: Medium
75. The demand for money curve shows

A) the quantity of money demanded at each interest rate, holding all other determinants unchanged.
B) the quantity of money made available by the Federal Reserves, holding all other determinants
unchanged.
C) the quantity of money demanded at each bond price, holding all other determinants unchanged.
D) the quantity of money demanded at price level, holding all other determinants unchanged.
Ans: A
Difficulty: Easy

76. When the money demand curve is drawn with interest rate on the vertical axis and the quantity of
money on the horizontal axis, the slope of the demand curve for money is
A) vertical.
B) horizontal.
C) positive.
D) negative.
Ans: D
Difficulty: Easy
77. The demand curve for money curve shows, all other things unchanged, the
A) quantity of money demanded at each price.
B) quantity of money demanded at each bond rate.
C) quantity of money demanded at each interest rate.
D) amount of money people demand at a specific interest rate.
Ans: C
Difficulty Easy
78. The demand for money is negatively related to

A) the interest rate and positively related to real GDP.
B) the interest rate and positively related to unemployment.
C) real GDP and positively related to the interest rate.
D) real GDP and positively related to the money supply.
Ans: A
Difficulty: Medium
79. Which of the following decreases the demand for money?

A) an increase in income
B) a decrease in real GDP
C) an increase in the price level
D) expectations of higher bond prices
Ans: C and D
Difficulty: Medium
80. Which of the following decreases the demand for money?

A) an increase in income
B) an increase in real GDP
C) a decrease in the price level
D) expectations of higher bond prices
Ans: C and D
Difficulty: Medium
81. Which of the following increases the demand for money?

A) an increase in the costs of transferring between money and non-money accounts
B) a decrease in real GDP
D) declining preferences by consumers for holding money
Ans: A
Difficulty: Medium
83. Which of the following does not cause the money demand curve to shift?
A) a change in the interest rate
B) a change in the price level
C) a change in transfer costs
D) a change in real GDP
Ans: A
Difficulty: Medium
84. An increase in financial innovations such as increased network of ATM machines and the
widespread acceptance of debit cards
A) will shift the demand for money to the right.
B) will shift the demand for money to the left.
C) increases the quantity of money people want to hold at each interest rate.
D) decreases the quantity of money people want to hold at each interest rate.
Ans: B
Difficulty: Medium
85. All of the following are determinants of money demand except

A) the cost of transferring funds from interest earning assets to checking accounts.
B) expectations about the future price level.
C) the money supply.
D) Real GDP.
Ans: C
Difficulty: Medium
86. The creation of savings plans such as savings deposits and money market mutual accounts that
allow easy transfer of funds between interest-earning assets and checkable deposits tends to
A) lower the cost of holding money.
B) reduce the demand for money.
C) increase the demand for money.
D) increase the risk of holding money.
Ans: B
Difficulty: Medium
87. If financial investors believe that the prices of bonds and other assets will fall,
A) their precautionary demand for money goes up.
B) their speculative demand for money goes up.
C) their precautionary demand for money goes down.
D) their speculative demand for money goes down.
Ans: B
Difficulty: Medium
88. Suppose present interest rates are relatively high. Financial investors will hold
A) smaller speculative balances because they expect bond prices to fall further.
B) larger speculative balances because they expect bond prices to fall further.
C) smaller speculative balances because they do not expect bond prices to fall further.
D) larger speculative balances because they do not expect bond prices to fall further.
Ans: C
Difficulty: Medium
89. An increase in interest rates is likely to cause

A) firms and households to increase the quantity of money demanded.
B) firms and households to decrease the quantity of money demanded.
C) the money demand curve to shift to the right.
D) the money demand curve to shift to the left.
Ans: B
Difficulty: Medium
90. Suppose the Fed announces that it expects interest rates to fall in the next quarter. What happens to
the demand for money today?
A) The precautionary demand for money goes up.
B) The speculative demand for money goes up.
C) The transaction demand for money goes down.
D) The speculative demand for money goes down.
Ans: D
Difficulty: Hard
91. The supply curve of money shows, all other things unchanged, the
A) quantity of money supplied at each price of bonds.
B) quantity of money supplied at each bond rate.
C) quantity of money supplied at each interest rate.
D) amount of money people supply at a specific interest rate.
Ans: C
Difficulty: Easy
Figure 10-3

Interest rate
Supply of Money
r2
r1
r0
Demand for money
Qo Q1 Q2
Quantity of money per period
92. Refer to Figure 10-3. The vertical money supply curve implies that
A) the money supply is determined by the banking system.
B) the money supply is determined by the Federal Reserve.
C) the money supply is determined by market forces of demand and supply.
D) the money supply is determined by real GDP.
Ans: B
Difficulty: Medium
93. Refer to Figure 10-3. In equilibrium the interest rate is

A) r2 and the quantity of money is Q0.
B) r0 and the quantity of money is Q2.
C) r1 and the quantity of money is Q1.
D) r and the quantity of money is Q2.
Ans: C
Difficulty: Medium
94. Refer to Figure 10-3. If the interest rate is above the equilibrium rate, there will be
A) an excess demand for money and the interest rate will rise.
B) an excess supply of money and the interest rate will fall.
C) an excess demand for money and the interest rate will fall.
D) an excess supply of money and the interest rate will rise.
Ans: B
Difficulty: Medium
95. Refer to Figure 10-3. If the rate of interest is below the equilibrium rate, there will be
A) an excess demand for money and the interest rate will rise.
B) an excess supply of money and the interest rate will fall.
C) an excess demand for money and the interest rate will fall.
D) an excess supply of money and the interest rate will rise.
Ans: A
Difficulty: Medium
96. If the quantity of money supplied does not respond to changes in the interest rate, then the money
supply curve is
A) vertical.
B) horizontal.
C) relatively flat but upward sloping.
D) relatively steep but upward sloping.
Ans: A
Difficulty: Medium
97. If the money supply curve is vertical, an increase in bond interest rates
A) is likely to cause banks to supply more money.
B) is likely to cause banks to supply less money.
C) has no effect on the money supply.
D) is likely to cause the Federal Reserve to increase the money supply.
Ans: C
Difficulty: Medium
98. What happens in the money market when there is an increase in the supply of money?
A) The equilibrium quantity of money increases and the equilibrium interest rate increases.
B) The equilibrium quantity of money increases and the equilibrium interest rate decreases.
C) The equilibrium quantity of money decreases and the equilibrium interest rate increases.
D) The equilibrium quantity of money decreases and the equilibrium interest rate decreases.
Ans: B
Difficulty: Medium
99. All else constant, an increase in the supply of money will lead to _______ A) an increase in the
equilibrium quantity of money and an increase in the equilibrium price of bonds.
B) an increase in the equilibrium quantity of money and a decrease in the equilibrium price of bonds.
C) a decrease in the equilibrium quantity of money and an increase in the equilibrium price of bonds.
D) a decrease in the equilibrium quantity of money and a decrease in the equilibrium price of bonds.
Ans: A
Difficulty: Hard
100. What happens in the money market when there is a decrease in the supply of money?
A) The equilibrium quantity of money increases and the equilibrium interest rate increases.
B) The equilibrium quantity of money increases and the equilibrium interest rate decreases.
C) The equilibrium quantity of money decreases and the equilibrium interest rate increases.
D) The equilibrium quantity of money decreases and the equilibrium interest rate decreases.
Ans: C
Difficulty: Medium
101. All else constant, a decrease in the supply of money will lead to A) an increase in the
equilibrium quantity of money and an increase in the equilibrium price of bonds.
B) an increase in the equilibrium quantity of money and a decrease in the equilibrium price of bonds.
C) a decrease in the equilibrium quantity of money and an increase in the equilibrium price of bonds.
D) a decrease in the equilibrium quantity of money and a decrease in the equilibrium price of bonds.
Ans: D
Difficulty: Hard
102. When the Fed conducts an open market sale, it

A) raises interest rates and increases the money supply.
B) raises interest rates and reduces the money supply.
C) lowers interest rates and reduces the money supply.
D) lowers interest rates and increases the money supply.
Ans: B
Difficulty: Medium
103. Suppose the Fed conducts an open market purchase. We can expect this transaction to
A) reduce the money supply, increase bond prices, and lower interest rates.
B) increase the money supply, lower bond prices, and lower interest rates.
C) increase the money supply, raise bond prices, and lower interest rates.
D) reduce the money supply, reduce bond prices, and increase interest rates.
Ans: C
Difficulty: Medium
104. Suppose the Fed conducts an open market sale. We can expect this transaction to
A) reduce the money supply, increase bond prices, and lower interest rates.
B) increase the money supply, lower bond prices, and lower interest rates.
C) increase the money supply, raise bond prices, and lower interest rates.
D) reduce the money supply, reduce bond prices, and increase interest rates.
Ans: D
Difficulty: Medium
105. If the Fed acts to increase the money supply,

A) it will sell bonds, drive bond prices up, and drive interest rates down.
B) it will buy bonds, drive bond prices down, and drive interest rates down.
C) it will sell bonds, drive bond prices up, and drive interest rates up.
D) it will buy bonds, drive bond prices up, and drive interest rates down.
Ans: D
Difficulty: Medium
106. If the Fed acts to decrease the money supply,

A) it will increase the supply of bonds, drive bond prices up, and drive interest rates down.
B) it will increase the demand for bonds, drive bond prices down, and drive interest rates down.
C) it will increase the supply of bonds, drive bond prices down, and drive interest rates up.
D) it will increase the demand for bonds, drive bond prices up, and drive interest rates down.
Ans: C
Difficulty: Medium
Figure 10-4
107. Refer to Figure 10-4. Which of the following could cause the demand curve to shift from D2 to
D1 ?
A) a decrease in the costs of transferring funds between money and non-money accounts
B) an increase in the interest rate
D) greater preferences by consumers for holding money
Ans: D
Difficulty: Medium
108. Refer to Figure 10-4. What happens in the bond market as a result of the shift in the money
demand curve from D1 to D2?
A) The demand for bonds increases.
B) The demand for bonds decreases.
C) The supply of bonds increases.
D) The supply of bonds decreases.
Ans: A
Difficulty: Medium
109. Refer to Figure 10-4. What happens in the product market as a result of the increase in money
demand?
A) The aggregate demand curve shifts to the left.

B) The aggregate demand curve shifts to the right.
C) The short-run aggregate supply curve shifts to the left.
D) The short-run aggregate supply curve shifts to the right.
Ans: A
Difficulty: Hard
110. All other things unchanged, why does an increase in money demand cause the aggregate demand
curve will shift to the left?
A) Because the resulting increase in bond prices reduces consumption spending.
B) Because the resulting decrease in bond interest rate will lead to an increase in the quantity of
investment and net exports.
C) Because the resulting higher interest rate will lead to a lower quantity of investment and net
exports.
D) Because the resulting lower interest rate will lead to lower net exports.
Ans: C
Difficulty: Medium
111. Action taken by the Fed to reduce the money supply will tend, all other things unchanged,
A) to reduce investment.
B) to increase investment.
C) to have no effect on net exports.
D) to increase real GDP and the price level.
Ans: A
Difficulty: Medium
Figure 10-5

112. Refer to Figure 10-5. What could have caused the money supply curve to shift from S1 to S2?
A) an open market purchase conducted by the Fed
B) an open market sale conducted by the Fed
C) an increase in tastes and preferences in favor of holding more money
D) an increase in the reserve requirement ratio
Ans: A
Difficulty: Medium
113. Refer to Figure 10-5. What happens in the bond market as a result of the shift in the money
supply curve from S1 to S2?
A) The demand for bonds increases.
B) The demand for bonds decreases.
C) The supply of bonds increases.
D) The supply of bonds increases.
Ans: A
Difficulty: Hard
114. Refer to Figure 10-5. What happens in the product market as a result of the increase in money
supply?
A) The aggregate demand curve shifts to the left.
B) The aggregate demand curve shifts to the right.
C) The short-run aggregate supply curve shifts to the left.
D) The short-run aggregate supply curve shifts to the right.
Ans: B
Difficulty: Hard

115. An increase in interest rates due to a decrease in the money supply will
A) reduce aggregate demand.
B) not change aggregate demand.
C) increase aggregate demand.
D) decrease aggregate supply in the short run and in the long run.
Ans: A
Difficulty: Medium
Figure 10-6
116. Refer to Figure 10-6. Panel (a) illustrates what happens when the Fed A) lowers the
money supply and lowers interest rates.
B) increases the money supply and increases interest rates.
C) increases the money supply and lowers interest rates.
D) lowers the money supply and increases interest rates.
Ans: C
Difficulty: Medium
117. Refer to Figure 10-6. Panel (b) illustrates what happens when the Fed A) lowers the
money supply and lowers interest rates.
B) increases the money supply and increases interest rates.
C) increases the money supply and lowers interest rates.
D) lowers the money supply and increases interest rates.
Ans: D
Difficulty: Medium

118. Refer to Figure 10-6. If the economy is experiencing a recessionary gap, the Fed would
A) sell government bonds, which would decrease the money supply and increase interest rates. The
results of such a policy are represented in Panel (b).
B) buy government bonds, which would decrease the money supply and decrease interest rates. The
results of such a policy are represented in Panel (a).
C) buy government bonds, which would increase the money supply and decrease interest rates. The
D) sell government bonds, which would increase the money supply and decrease interest rates. The
Ans: C
Difficulty: Hard
119. Refer to Figure 10-6. If the economy is experiencing an inflationary gap, the Fed would
A) buy government bonds, which would increase the money supply and decrease interest rates. The
B) sell government bonds, which would decrease the money supply and increase interest rates. The
C) buy government bonds, which would decrease the money supply and increase interest rates. The
D) sell government bonds, which would increase the money supply and increase interest rates. The
Ans: B
Difficulty: Hard
120. Refer to Figure 10-6. If the Fed wants to encourage investment and expand the economy, it
would conduct A) an expansionary monetary policy such as an open market purchase. The results
of such a policy are represented in Panel (a).
B) a contractionary monetary policy such as an open market sale. The results of such a policy are
represented in Panel (b). C) an expansionary monetary policy such as an open market sale. The
D) a contractionary monetary policy such as an open market purchase. The results of such a policy
are represented in Panel (a).
Ans: A
Difficulty: Hard
121. Refer to Figure 10-6. An increase in U.S. interest rates would A) decrease the demand for U.S.
dollars, increase the exchange rate, and lead to a decrease in net exports. The results of such a
policy are represented in Panel (b).
B) decrease the demand for U.S. dollars, decrease the exchange rate, and lead to an increase in net
exports. The results of such a policy are represented in Panel (a).
C) increase the demand for U.S. dollars, increase the exchange rate, and lead to a decrease in net
exports. The results of such a policy are represented in Panel (b).
D) increase the demand for U.S. dollars, decrease the exchange rate, and lead to a decrease in net
exports. The results of such a policy are represented in Panel (b).
Ans: C
Difficulty: Hard

Figure 10-7
122. Refer to Figure 10-7. The shift in the money supply curve from S1 to S2 is due to
A) an open market sale conducted by the Fed.
B) an open market purchase conducted by the Fed.
C) an issue of new securities by the government to finance government spending.
D) an increase in government borrowing.
Ans: B
Difficulty: Medium
123. Refer to Figure 10-7. Following the increase in money supply, at the original interest rate of 6%,
there is
A) an excess demand for money.
B) an excess supply of money.
C) an equilibrium in the money market.
D) pressure for the interest rate to rise.
Ans: B
Difficulty: Medium
124. Refer to Figure 10-7. The increase in money supply and the resulting decrease in the interest rate
from 6% to 4%, is accomplished by action that also
A) lowers the price of government bonds.
B) raises the interest rate on government bonds.
C) increases the demand for government bonds.
D) increases the supply of government bonds.
Ans: C
Difficulty: Hard

125. Refer to Figure 10-7. The increase in money supply leads to a(n)
A) decrease in investment, a decrease in real GDP, and a shift to the left in the money demand curve.
B) increase in investment, a decrease in real GDP, and a shift to the right in the money demand curve.
C) increase in investment, an increase in real GDP, and a shift to the left in the money demand curve.
D) increase in investment, an increase in real GDP, and a shift to the right in the money demand
curve.
Ans: D
Difficulty: Hard
126. An increase in the money supply by the Federal Reserve is likely to increase
I. consumption expenditures
II. investment expenditures
III. interest rates
IV. the exchange rate
A) I, II, III, and IV
B) I, II, and III
C) I, II, and IV
D) I and II
Ans: D
Difficulty: Medium
127. An increase in the money supply by the Federal Reserve is likely to increase
I. net exports.
II. the exchange rate.
III. interest rates.
IV. aggregate demand.
A) I, II, III, and IV
B) I, II, and IV
C) I, III, and IV
D) I and IV
Ans: D
Difficulty: Medium
128. An increase in the supply of money will lead to a(n) A) increase in equilibrium real GDP and an
increase in equilibrium price level.
B) increase in equilibrium real GDP and a decrease in equilibrium price level.

C) decrease in equilibrium real GDP and an increase in equilibrium price level.
D) decrease in equilibrium real GDP and a decrease in equilibrium price level.
Ans: A
Difficulty: Medium

129. An increase in the supply of money will lead to a(n)
A) increase in equilibrium real GDP and an increase in the equilibrium interest rate.
B) increase in equilibrium real GDP and a decrease in the equilibrium interest rate.
C) decrease in equilibrium real GDP and an increase in the equilibrium interest rate.
D) decrease in equilibrium real GDP and a decrease in the equilibrium interest rate.
Ans: B
Difficulty: Medium
130. A decrease in the supply of money will lead to a(n)

A) increase in equilibrium real GDP and an increase in equilibrium price level.
B) increase in equilibrium real GDP and a decrease in equilibrium price level.
C) decrease in equilibrium real GDP and an increase in equilibrium price level.
D) decrease in equilibrium real GDP and a decrease in equilibrium price level.
Ans: D
Difficulty: Medium
131. A decrease in the supply of money will lead to a(n)

A) increase in equilibrium real GDP and an increase in the equilibrium interest rate.
B) increase in equilibrium real GDP and a decrease in the equilibrium interest rate.
C) decrease in equilibrium real GDP and an increase in the equilibrium interest rate.
D) decrease in equilibrium real GDP and a decrease in the equilibrium interest rate.
Ans: C
Difficulty: Medium
Figure 10-8

132. Refer to Figure 10-8. If the economy is at point a,
A) employment is greater than the natural level of employment.
B) it is at the natural level of employment.
C) it is in a recessionary gap.
D) the unemployment rate is negative.
Ans: B
Difficulty: Medium
133. Refer to Figure 10-8. If the economy is at point c,

A) it is in a recessionary gap.
B) it is at natural level of employment.
C) the level of employment is greater than the natural level of employment.
D) the unemployment rate is negative.
Ans: A
Difficulty: Medium
134. Refer to Figure 10-8. If the economy is at point c, the Federal Reserve can close the output gap
by buying bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.
Ans: B
Difficulty: Medium
135. Refer to Figure 10-8. If the economy is at point c, the Federal Reserve can close the output gap
A) by pursuing an expansionary monetary policy to raise the interest rate and increase short run
aggregate supply.
B) by pursuing a contractionary monetary policy to drive down the interest rate and increase
aggregate demand.
C) by pursuing an expansionary monetary policy to drive down the interest rate and increase
aggregate demand.
D) by pursuing a contractionary monetary policy to raise the interest rate and increase short run
aggregate supply.
Ans: C
Difficulty: Medium
136. Refer to Figure 10-8. If the economy is at point c, an open market purchase would cause
A) a shift of the short run aggregate supply curve from AS1 to AS2.
B) a shift of the short run aggregate supply curve from AS2 to AS1.
C) a shift of the aggregate demand curve from AD1 to AD2.
D) a shift of the aggregate demand curve from AD2 to AD1.
Ans: C
Difficulty: Medium
137. Refer to Figure 10-8. Short-run but not long-run equilibrium positions occur at points
A) a and b.
B) b and c.
C) c and d.
D) a and c.
Ans: B
Difficulty: Medium
138. Refer to Figure 10-8. Long-run equilibrium positions occur at points

A) a and d.
B) a and b.
C) c and d.
D) b and d.
Ans: A
Difficulty: Medium

139. Refer to Figure 10-8. If the economy is at point b,
A) the unemployment rate is negative.
B) the unemployment rate is zero.
C) the level of employment is greater than the natural level of employment.
D) it is at the natural level of employment.
Ans: C
Difficulty: Medium
140. Refer to Figure 10-8. If the economy is at point b, the Federal Reserve can close the output gap
by selling bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.
Ans: A
Difficulty: Medium
141. Refer to Figure 10-8. If the economy is at point b, the Federal Reserve can close the output gap
A) by pursuing an expansionary monetary policy to raise the interest rate and decrease short run
aggregate supply.
B) by pursuing a contractionary monetary policy to drive down the interest rate and decrease
aggregate demand.
C) by pursuing an expansionary monetary policy to drive down the interest rate and decrease short run
aggregate supply.
D) by pursuing a contractionary monetary policy to raise the interest rate and reduce aggregate
demand.
Ans: D
Difficulty: Medium
142. Refer to Figure 10-8. Assume that the economy is at point b. A decrease in the money supply
would cause
A) a shift of the aggregate demand curve from AD1 to AD2.
B) a shift of the aggregate demand curve from AD2 to AD1.
C) a shift of the short run aggregate supply curve from AS1 to AS2.
D) a shift of the short run aggregate supply curve from AS2 to AS1.
Ans: B
Difficulty: Medium

143. Which of the following are reasons that caused the Fed to abandon its practice of setting money
supply targets?
I. expiration of the legislation requiring the Fed to do so
II. banking deregulation in the 1980s allowing for MMDAs
III. financial development of retail sweep programs
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III
Ans: D
Difficulty: Medium
144. Which of the following statements is true?

A) Advancements in statistical methods and data collection have made it possible for the Fed to
closely link the changes in the rate of growth in M1 and M2 with changes in the rate of growth of
GDP.
B) The introduction of new financial products and changes in the ways people pay for transactions
have blurred the distinction between M1 and M2 so that the Fed no longer has reliable estimates of
the money demand curve.
C) With the proliferation of new financial products, the close relationship between M1 growth and
output growth has been further strengthened.
D) Unlike the demand for M1, the demand for the much broader M2 money aggregate is unaffected by
the financial innovation in interest bearing checking deposits.
Ans: B
Difficulty: Medium
145. Some economists have proposed a new definition of money that would better track money
demand. One such measure is the MZM or “money zero maturity”. What kind of items will be
included in this measure?
A) Assets that have no maturity such as cash, checking accounts, and shares of stocks.
B) Assets that can be converted to cash with zero penalty and securities that are issued by the U.S.
government since these are virtually risk free.
C) Any deposits that do not have specified maturity terms, just as long as these deposits are fairly
liquid and are used by consumers to pay for transactions.
D) Liquid accounts held by the public, regardless of whether they are classified as M1 or M2 and the
reserves of banks that earn no interest since these could be used to create money.
Ans: C
Difficulty: Medium

True/False
146. The demand for money curve is negatively sloped because people tend to hold less money at
lower interest rates.
Ans: False
Difficulty: Medium
147. Expectations that bond prices will be rising in the near future are likely to decrease the demand
for money.
Ans: True
Difficulty: Medium
148. Higher interest rates tend to increase the demand for money.
Ans: False
Difficulty: Medium
149. The supply curve of money is horizontal at the market interest rate.
Ans: False
Difficulty: Medium
150. When the price of a bond rises, the interest rate paid on the bond also rises.
Ans: False
Difficulty: Medium
151. An increase in the money supply will reduce interest rates and increase the price of bonds.
Ans: True
Difficulty: Medium
152. An increase in the money supply tends to reduce investment.

Ans: False
Difficulty: Medium
153. An increase in the money supply will decrease both interest rates and exchange rates.
Ans: True
Difficulty: Medium
154. An increase in the money supply will shift the aggregate demand curve to the left, resulting in a
lower equilibrium price level and a lower equilibrium real GDP.
Ans: False
Difficulty: Medium

155. An increase in bond prices accompanies a decrease in interest rates.
Ans: True
Difficulty: Medium
156. An increase in the supply of bonds leads to an increase in aggregate demand.

Ans: False
Difficulty: Medium
157. The exchange rate increases when there is a decrease in the demand for bonds.
Ans: True
Difficulty: Medium
158. The face value of a bond is the amount that will be paid to the holder of the bond when it
matures.
Ans: True
Difficulty: Easy
159. When interest rates fall, people will be willing to hold more money.
Ans: True
Difficulty: Medium
160. At higher interest rates, people will hold more money.

Ans: False
Difficulty: Medium
161. When the Fed sells government bonds in the open market, the money supply will increase.
Ans: False
Difficulty: Medium
162. When the Fed sells government bonds in the open market, interest rates will rise.
Ans: True
Difficulty: Medium
163. The Fed could conduct an open market sale to eliminate an inflationary gap.
Ans: True
Difficulty: Medium
164. The Fed could conduct an open market purchase to eliminate an inflationary gap.
Ans: False
Difficulty: Medium

165. The demand curve for money shows the quantity of money demanded at each interest rate, all
other things unchanged.
Ans: True
Difficulty: Medium
166. A rise in bond prices would cause the price of a dollar to rise.
Ans: False
Difficulty: Medium
167. An increase in the money supply will lower the equilibrium rate of interest.
Ans: True
Difficulty: Medium
168. As a result of an increase in the money supply, the aggregate demand will shift to the left.
Ans: False
Difficulty: Medium
169. The transactions demand for money is the money households and firms hold in order to pay for
goods and services they buy.
Ans: True
Difficulty: Medium
170. If the prices of bonds go up, the interest rates will fall and the quantity of investment demanded
will rise.
Ans: True
Difficulty: Medium

Short Answer
171. Explain the relationships among the face value of a bond, the price of a bond, and the interest rate
paid on the bond.
172. Explain what happens in the bond market when the Fed conducts an open market purchase. A
complete answer should explain what happens to bond prices, the quantity of bonds traded and the
interest rate. Illustrate your answer with a demand-supply graph of the bond market.
173. Why is there a negative relationship between the interest rate and the quantity of money
demanded?
174. Using a money market diagram and a diagram of aggregate demand and aggregate supply,
explain how the Fed can eliminate an inflationary gap. Be sure to include in your answer a
discussion of what happens to the money supply, interest rates, and the components of aggregate
demand.
175. Using a money market diagram and a diagram of aggregate demand and aggregate supply,
explain how the Fed can eliminate a recessionary gap. Be sure to include in your answer a
discussion of what happens to the money supply, interest rates, and the components of aggregate
demand.
176. Explain the link between U.S. interest rates, the dollar exchange rate, and net exports. Explain
why high interest rates in the United States cause net exports to fall and low interest rates cause
net exports to rise?

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Principles of Macroeconomics Version 3 0 3rd Edition Rittenberg Test Bank

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Principles of Macroeconomics Version

3.0 3rd Edition Rittenberg Test Bank

©2013 Flat World Knowledge, Inc. 1

1. Financial markets are

2. Since the late 1970s, the United States

3. A buyer of a newly-issued bond

5. The face value of a bond is

6. The interest rate on a bond is

©2013 Flat World Knowledge, Inc. 3

10. The price of a bond is determined by

11. Which of the following statements is true?

14. Which of the following statements is true about bonds?

15. Which of the following statements is true about bonds?

16. The interest rate on a bond is

17. The demand for bonds curve slopes downwards because

18. The supply of bonds curve slopes upwards because

19. All else constant, an increase in the demand for bonds

20. All else constant, an increase in the supply of

21. An increase in the demand for bonds

22. An increase in the supply of bonds

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27. If bond prices rise,

28. If bond prices fall,

29. An increase in the demand for bonds leads to

30. An increase in the supply of bonds leads to

32. A country's exchange rate is the

33. Currency rates of exchange are determined by

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37. Which of the following is an index of exchange rates?

38. The foreign exchange market

42. A higher U.S. exchange rate means that

43. If the U.S. exchange rate falls,

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©2013 Flat World Knowledge, Inc. 12

48. An increase in the demand for bonds generates

49. An increase in the supply of bonds generates

51. A fall in the price of bonds may lead to a(n):

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©2013 Flat World Knowledge, Inc. 15

61. In deciding how much money to hold, individuals

62. What are the three motives for holding money?

73. Refer to Scenario 1. At low interest rates, an individual

74. The opportunity cost of holding money is

75. The demand for money curve shows

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78. The demand for money is negatively related to

79. Which of the following decreases the demand for money?

80. Which of the following decreases the demand for money?

81. Which of the following increases the demand for money?

85. All of the following are determinants of money demand except

89. An increase in interest rates is likely to cause

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Demand for money

Quantity of money per period

93. Refer to Figure 10-3. In equilibrium the interest rate is

102. When the Fed conducts an open market sale, it

105. If the Fed acts to increase the money supply,

106. If the Fed acts to decrease the money supply,

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