kim226

Which of the following statements about the relationship between interest rates and the demand for and supply of money is most accurate? Interest rates affect:

A) the supply of money only.

B) both the demand for and supply of money.

C) the demand for money only.

---

Interest rates only affect the demand for money. With higher interest rates, the opportunity cost of holding money increases, and people hold less money and more interest-earning assets. Monetary authorities determine the supply of money. Therefore, the supply of money is independent of the interest rate.

kim226

The demand for money curve represents the relationship between the quantity of money demanded and:

A) the quantity of money supplied.

B) short-term interest rates.

C) the price level.

---

The demand for money curve represents the relationship between short-term interest rates and the quantity of real money that households and firms demand to hold.

kim226

Which of the following statements regarding money demand and supply is least accurate?

A) As the Fed reduces the money supply, short-term interest rates decrease.

B) The supply curve for money is vertical.

C) The supply of money is determined by the monetary authority and is not affected by changes in interest rates.

---

As the Fed reduces the money supply, short-term interest rates increase. The other statements concerning the demand and supply for money are true.

kim226

The supply of money is primarily determined by:

A) the monetary authorities.

B) interest rates.

C) inflation.

---

The monetary authorities determine the quantity of money available to the economy. Inflation and interest rates affect the demand for money balances.

kim226

Which of the following statements about the demand and supply of money is most accurate? People who are:

A) holding money when interest rates are higher will try to reduce their money balances and, as a result, the demand for money decreases.

B) holding money when interest rates are lower will try to increase their money balances and, as a result, the supply of money increases.

C) buying bonds to reduce their money balances will increase the demand for bonds with an associated increase in interest rates.

---

Buying bonds would drive bond prices up and interest rates down. Selling bonds would have the opposite effect; driving bond prices down and interest rates up. When interest rates are lower, there is an excess demand for money. The supply of money is determined by the monetary authorities.

kim226

If households are holding larger real money balances than they desire, which of the following is least likely?

A) The central bank must sell securities to absorb the excess money supply and establish equilibrium.

B) The interest rate is higher than its equilibrium rate in the market for real money balances.

C) The opportunity cost of holding money balances will decrease.

---

If households’ real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank.

kim226

Which of the following is determined by the equilibrium between the demand for money and the supply of money?

A) Money supply.

B) Interest rate.

C) Inflation rate.

---

Interest rates are determined by the equilibrium between money supply and money demand.

kim226

If the money interest rate is measured on the y-axis and the quantity of money is measured on the x-axis, the money supply curve is:

A) downward sloping to the lower right.

B) upward sloping to the upper right.

C) vertical.

---

The money supply schedule is vertical because it is not affected by changes in the interest rate but is determined by the monetary authorities such as the Federal Reserve System (Fed) in the United States.

kim226

The Fisher effect holds that a nominal rate of interest equals a real rate:

A) plus actual inflation.

B) plus expected inflation.

C) minus expected inflation.

---

The Fisher effect states that a nominal rate of interest equals a real rate plus expected inflation.

kim226

Central banks are most likely to pursue a target inflation rate:

A) between 0 and 3%.

B) above 3%.

C) equal to 0%.

---

Central banks typically define price stability as a stable inflation rate of about 2% to 3%. A target of zero is not typically used because it would risk deflation.