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CHAPTER 5
8) If the expected return on ABC stock is unchanged and the expected return on CBS stock falls from 10 to 5 percent, then the expected return of holding CBS stock _____ relative to ABC stock and the demand for ABC stock _____.
(a) rises; rises
(b) rises; falls
(c) falls; rises
(d) falls; falls
Answer: C
14) If interest rates on Treasury bonds are suddenly expected to shoot up, then, other things equal, the demand for houses will _____ and that of Treasury bonds will _____.
(a) increase; increase
(b) increase; decrease
(c) decrease; decrease
(d) decrease; increase
Answer: B
17) When people begin to expect a large stock market decline, the demand curve for bonds shifts to the _____ and the interest rate _____.
(a) right; rises
(b) right; falls
(c) left; falls
(d) left; rises
Answer: B
24) Holding the expected return on bonds constant, a decrease in the expected return on stocks would _____ the demand for bonds, shifting the demand curve to the _____.
(a) decrease; left
(b) decrease; right
(c) increase; left
(d) increase; right
Answer: D
27) If interest rates are expected to rise in the future, the demand for long-term bonds _____ and the demand curve shifts to the _____.
(a) rises; right
(b) rises; left
(c) falls; right
(d) falls; left
Answer: D
36) If fluctuations in interest rates become greater, then, other things equal, the demand for common stocks _____ and that of long-term bonds _____.
(a) increases; increases
(b) increases; decreases
(c) decreases; decreases
(d) decreases; increases
Answer: B
41) When stock prices become more volatile, the demand curve for bonds shifts to the _____ and the interest rate _____.
(a) right; rises
(b) right; falls
(c) left; falls
(d) left; rises
Answer: B
52) An increase in the liquidity of bonds results in a _____ in demand for bonds and the demand curve shifts to the _____.
(a) rise; right
(b) rise; left
(c) fall; right
(d) fall; left
Answer: A
55) An increase in the expected rate of inflation will _____ the expected return on bonds relative to the that on _____ assets, and shift the _____ curve to the left.
(a) reduce; financial; demand
(b) reduce; real; demand
(c) raise; financial; supply
(d) raise; real; supply
Answer: B
62) Factors that increase the demand for bonds include
(a) an increase in the inflation rate.
(b) an decrease in the liquidity of common stocks.
(c) a decrease in the volatility of stock prices.
(d) all of the above.
Answer: B
65) Factors that increase the demand for bonds include
(a) an increase in the volatility of stock prices.
(b) a decrease in the expected returns on stocks.
(c) a decrease in the inflation rate.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: D
75) The demand for Charles M. Russell paintings declines (holding everything else equal) when:
(a) stocks become easier to sell.
(b) people expect a boom in real estate prices.
(c) Treasury securities become riskier.
(d) all of the above occur.
(e) both (a) and (b) of the above occur.
Answer: E
80) You would be more willing to purchase U.S. Treasury bonds, other things equal, if
(a) you inherit $1 million from your Uncle Harry.
(b) you expect interest rates to rise.
(c) gold becomes more liquid.
(d) any of the above occurs.
(e) either (b) or (c) of the above occurs.
Answer: A
84) You would be less willing to buy AT&T bonds (holding everything else constant) if
(a) the brokerage commissions on bond sales rise.
(b) interest rates are expected to rise.
(c) you expected jewelry to appreciate sharply in value.
(d) any of the above occurs.
(e) either (a) or (c) of the above occurs.
Answer: D
85) Holding everything else constant,
(a) if asset A’s risk rises relative to that of alternative assets, the demand for asset A will fall.
(b) the more liquid asset A, relative to alternative assets, the greater will be the demand for asset A.
(c) the lower the expected return to asset A relative to alternative assets, the greater will be the demand for asset A.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: E
101) Factors that can cause the supply curve for bonds to shift to the right include
(a) an expansion in overall economic activity.
(b) an increase in expected inflation.
(c) an increase in government deficits.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: D
104) Factors that can cause the supply curve for bonds to shift to the left include
(a) a decrease in expected inflation.
(b) a decrease in government deficits.
(c) an expansion in overall economic activity.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: E
112) When the inflation rate is expected to increase, the real cost of borrowing declines at any given interest rate; the supply of bonds _____ increases and the supply curve shifts to the _____.
(a) increases; left
(b) increases; right
(c) decreases; left
(d) decreases; right
Answer: B
118) When the inflation rate is expected to increase, the _____ of bonds increases while the _____ curve shifts to the left.
(a) demand; demand
(b) demand; supply
(c) supply; demand
(d) supply; supply
Answer: C
120) When the inflation rate is expected to rise, interest rates will ____; this result has been termed the _____.
(a) fall; Keynes effect
(b) fall; Fisher effect
(c) rise; Pigou effect
(d) rise; Fisher effect
(e) rise; Keynes effect
Answer: D
122) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates _____ as the expected rate of inflation _____.
(a) rise; increases
(b) rise; stabilizes
(c) rise; decreases
(d) fall; increases
(e) fall; stabilizes
Answer: A
133) When the interest rate on a bond is _____ the equilibrium interest rate, in the bond market there is excess _____ and the interest rate will _____.
(a) below; demand; rise
(b) below; demand; fall
(c) below; supply; fall
(d) above; supply; rise
(e) below; supply; rise
Answer: E
140) When the interest rate falls, either the demand for bonds ______ or the supply of bonds _____.
(a) increases; increases
(b) increases; decreases
(c) decreases; decreases
(d) decreases; increases
Answer: B
155) When the federal government’s budget deficit increases, the _____ curve for bonds shifts to the _____.
(a) demand; right
(b) demand; left
(c) supply; left
(d) supply; right
Answer: D
157) When the expected inflation rate increases, the demand for bonds _____, the supply of bonds _____, and the interest rate ______.
(a) increases; increases; rises
(b) decreases; decreases; falls
(c) increases; decreases; falls
(d) decreases; increases; rises
Answer: D
169) A low savings rate causes the _________ bonds to fall, and ______ to increase.
(a) demand for; interest rates
(b) supply of; interest rates
(c) demand for; bond prices
(d) supply of; bond prices
(e) supply of; exchange rates
Answer: A
170) A low savings rate causes the _________ bonds to fall, and ______ to decrease.
(a) demand for; interest rates
(b) supply of; interest rates
(c) demand for; bond prices
(d) supply of; bond prices
(e) supply of; exchange rates
Answer: C
209) When comparing the Loanable Funds and Liquidity Preference Frameworks of interest rate determination, which of the following are true?
(a) The loanable funds framework is easier to use when analyzing the effects from changes in expected inflation.
(b) The liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of money.
(c) In most instances, the two approaches to interest rate determination yield the same predictions.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
Answer: D
213) In Keynes’s liquidity preference framework, individuals are assumed to hold their wealth in two forms:
(a) real assets and financial assets.
(b) stocks and bonds.
(c) money and bonds.
(d) money and gold.
Answer: C
216) In Keynes’s liquidity preference framework,
(a) the demand for bonds must equal the supply of money.
(b) the demand for money must equal the supply of bonds.
(c) an excess demand of bonds implies an excess demand for money.
(d) an excess supply of bonds implies an excess demand for money.
Answer: D
219) The opportunity cost of holding money is
(a) the level of income.
(b) the price level.
(c) the interest rate.
(d) all of the above.
(e) only (a) and (b) of the above.
Answer: C
222) If there is an excess supply of money
(a) individuals sell bonds, causing the interest rate to rise.
(b) individuals sell bonds, causing the interest rate to fall.
(c) individuals buy bonds, causing interest rates to fall.
(d) individuals buy bonds, causing interest rates to rise.
(e) individuals buy bonds, causing bond prices to fall.
Answer: C
235) In the Keynesian liquidity preference model, a business cycle _________ causes income to ________ and interest rates to ________.
(a) expansion; decrease; decrease
(b) expansion; increase; decrease
(c) contraction; increase; increase
(d) contraction; decrease; decrease
(e) contraction; decrease; increase
Answer: D
236) In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to _____ and the demand curve to shift to the _____.
(a) increase; left
(b) increase; right
(c) decrease; left
(d) decrease; right
Answer: B

Figure 5-5
293) Figure 5-5 illustrates the effect of an increased rate of money supply growth. 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.
Answer: A
294) Figure 5-5 illustrates the effect of an increased rate of money supply growth. 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.
Answer: C

Figure 5-6
295) Figure 5-6 illustrates the effect of an increased rate of money supply growth. 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.
Answer: C
296) Figure 5-6 illustrates the effect of an increased rate of money supply growth. 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.
Answer: A

Figure 5-7
297) Figure 5-7 illustrates the effect of an increased rate of money supply growth. 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.
Answer: D
298) Figure 5-7 illustrates the effect of an increased rate of money supply growth. 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
Answer: B