Question1: At interest rates below the equilibrium rate of interest
[A] There is an excess demand for money and the interest rate will fall.
[B] There is an excess demand for bonds and the interest rate will fall.
[C] There is an excess demand for money and the interest rate will rise.
[D] There is an excess supply of bonds and the interest rate will fall.
Question2: In Liquidity Preference, why does the demand curve for money slope downward?
[A] Because people are more willing to hold money when interest rates are low.
[B] Because the Fed increases the money supply when interest rates fall.
[C] Because people want to hold more money when prices rise.
[D] Because people carry out more monetary transactions when their incomes rise.
Question3: Increasing government deficits causes
[A] The supply curve for bonds to shift left because corporations will borrow less due to decreased profitability when the government is in debt.
[B] The supply curve for bonds to shift right because the United State Treasury will issue bonds to pay for the deficit.
[C] The supply curve for bonds to shift right because government bonds pay higher interest relative to other bonds.
[D] The supply curve for bonds to shift left because government bonds slow expected inflation.
Question4: In the Liquidity Preference framework, the price level effect differs from the expected inflation effect in that:
[A] The price level effect has a larger impact on interest rates than the expected inflation effect.
[B] The price level effect remains and the expected inflation effect reverses.
[C] The price level effect always dominates the expected inflation effect.
[D] The price level effect is temporary and the expected inflation effect is permanent.