Chapter5

TheBehaviorofInterestRates

5.1 DeterminantsofAssetDemand
1) Ofthefourfactorsthatinfluenceassetdemand,whichfactorwillcausethedemandforall
assetstoincreasewhenitincreases,everythingelseheldconstant?
A) wealth
B) expectedreturns
C) risk
D) liquidity
Answer: A
QuesStatus:New

2) Ifwealthincreases,thedemandforstocks________andthatoflong -termbonds________,
everythingelseheldconstant.
A) increases;increases
B) increases;decreases
C) decreases;decreases
D) decreases;increases
Answer: A
QuesStatus:PreviousEdition

3) Everythingelseheldconstant,adecreaseinwealth
A) increasesthedemandforstocks.
B) increasesthedemandforbonds.
C) reducesthedemandforhousing.
D) increasesthedemandforhousing.
Answer: C
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates99

4) Everythingelseheldconstant,iftheexpectedreturnonABCstockrisesfrom5to10percent
andtheexpectedreturnonCBSstockisunchanged,thentheexpectedreturnofholdingCBS
stock________relativetoABCstockandthedemandforCBSstock________.
A) rises;rises
B) rises;falls
C) falls;rises
D) falls;falls
Answer: D
QuesStatus:Revised

5) Everythingelseheldconstant,iftheexpectedreturnonU.S.Treasurybondsfallsfrom10to5
percentandtheexpectedreturnonGEstockrisesfrom7to8percent,thentheexpectedreturn
ofholdingGEstock________relativetoU.S.TreasurybondsandthedemandforGEstock
________.
A) rises;rises
B) rises;falls
C) falls;rises
D) falls;falls
Answer: A
QuesStatus:Revised

6) Ifhousingpricesaresuddenlyexpectedtoshootup,then,otherthingsequal,thedemandfor
houseswill________andthatofTreasurybillswill________.
A) increase;increase
B) increase;decrease
C) decrease;decrease
D) decrease;increase
Answer: B
QuesStatus:PreviousEdition

7) Ifstockpricesareexpectedtodropdramatically,then,otherthingsequal,thedemandfor
stockswill________andthatofTreasurybillswill________.
A) increase;increase
B) increase;decrease
C) decrease;decrease
D) decrease;increase
Answer: D
QuesStatus:PreviousEdition

100MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

8) Everythingelseheldconstant,iftheexpectedreturnonRSTstockdeclinesfrom12to9percent
andtheexpectedreturnonXYZstockdeclinesfrom8to7percent,thentheexpectedreturnof
holdingRSTstock________relativetoXYZstockanddemandforXYZstock________.
A) rises;rises
B) rises;falls
C) falls;rises
D) falls;falls
Answer: C
QuesStatus:Revised

9) Everythingelseheldconstant,iftheexpectedreturnonU.S.Treasurybondsfallsfrom8to7
percentandtheexpectedreturnoncorporatebondsfallsfrom10to8percent,thenthe
expectedreturnofcorporatebonds________relativetoU.S.Treasurybondsandthedemand
forcorporatebonds________.
A) rises;rises
B) rises;falls
C) falls;rises
D) falls;falls
Answer: D
QuesStatus:Revised

10) Anincreaseintheexpectedrateofinflationwill________theexpectedreturnonbonds
relativetothethaton________assets,everythingelseheldconstant.
A) reduce;financial
B) reduce;real
C) raise;financial
D) raise;real
Answer: B
QuesStatus:Revised

11) Iffluctuationsininterestratesbecomesmaller,then,otherthingsequal,thedemandforstocks
________andthedemandforlong-termbonds________.
A) increases;increases
B) increases;decreases
C) decreases;decreases
D) decreases;increases
Answer: D
QuesStatus:PreviousEdition

Chapter5 TheBehaviorofInterestRates101

12) Ifthepriceofgoldbecomeslessvolatile,then,otherthingsequal,thedemandforstockswill
________andthedemandforantiqueswill________.
A) increase;increase
B) increase;decrease
C) decrease;decrease
D) decrease;increase
Answer: C
QuesStatus:PreviousEdition

13) Ifbrokeragecommissionsonbondsalesdecrease,then,otherthingsequal,thedemandfor
bondswill________andthedemandforrealestatewill________.
A) increase;increase
B) increase;decrease
C) decrease;decrease
D) decrease;increase
Answer: B
QuesStatus:New

14) Ifgoldbecomesacceptableasamediumofexchange,thedemandforgoldwill________and
thedemandforbondswill________,everythingelseheldconstant.
A) decrease;decrease
B) decrease;increase
C) increase;increase
D) increase;decrease
Answer: D
QuesStatus:New

15) ThedemandforJacksonPollackpaintingsrises(holdingeverythingelseequal)when:
A) stocksbecomeeasiertosell.
B) peopleexpectaboominrealestateprices.
C) Treasurysecuritiesbecomeriskier.
D) peoplesuddenlyexpectgoldpricestorise.
Answer: C
QuesStatus:PreviousEdition

102MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

16) Thedemandforsilverbulliondecreases,otherthingsequal,when
A) thegoldmarketissuddenlyexpectedtoboom.
B) themarketforsilverbullionbecomesmoreliquid.
C) wealthgrowsrapidly.
D) interestratesareexpectedtofall.
Answer: A
QuesStatus:Revised

17) YouwouldbelesswillingtopurchaseU.S.Treasurybonds,otherthingsequal,if
A) youinherit$1millionfromyourUncleHarry.
B) youexpectinterestratestofall.
C) goldbecomesmoreliquid.
D) stocksbecomeeasiertosell.
Answer: C
QuesStatus:Revised

18) YouwouldbemorewillingtobuyAT&Tbonds(holdingeverythingelseconstant)if
A) thebrokeragecommissionsonbondsalesbecomecheaper.
B) interestratesareexpectedtorise.
C) youhadsufferedbiglossesinthestockmarket.
D) youexpectedjewelrytoappreciatesharplyinvalue.
Answer: A
QuesStatus:Revised

19) Holdingeverythingelseconstant,
A) ifassetAsriskrisesrelativetothatofalternativeassets,thedemandwillincreasefor
assetA.
B) themoreliquidisassetA,relativetoalternativeassets,thegreaterwillbethedemand
forassetA.
C) thelowertheexpectedreturntoassetArelativetoalternativeassets,thegreaterwillbe
thedemandforassetA.
D) ifwealthincreases,demandforassetAincreasesanddemandforalternativeassets
decreases.
Answer: B
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates103

20) Thedemandforgoldbullionincreases,otherthingsequal,when
A) themarketforsilverbullionbecomesmoreliquid.
B) interestratesareexpectedtorise.
C) interestratesareexpectedtofall.
D) realestatepricesareexpectedtoincrease.
Answer: B
QuesStatus:Revised

21) Everythingelseheldconstant,wouldanincreaseinvolatilityofstockpriceshaveanyimpact
onthedemandforrarecoins?Whyorwhynot?
Answer: Yes,itwouldcausethedemandforrarecoinstoincrease.Theincreasedvolatilityof
stockpricesmeansthatthereisrelativelymoreriskinowningstockthantherewas
previouslyandsothedemandforanalternativeasset,rarecoins,wouldincrease.
QuesStatus:New

5.2 SupplyandDemandintheBondMarket
1) Thedemandcurveforbondshastheusualdownwardslope,indicatingthatat________prices
ofthebond,everythingelseequal,the________ishigher.
A) higher;demand
B) higher;quantitydemanded
C) lower;demand
D) lower;quantitydemanded
Answer: D
QuesStatus:PreviousEdition

2) Thesupplycurveforbondshastheusualupwardslope,indicatingthatastheprice________,
ceterisparibus,the________increases.
A) falls;supply
B) falls;quantitysupplied
C) rises;supply
D) rises;quantitysupplied
Answer: D
QuesStatus:PreviousEdition

104MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

3) Inthebondmarket,themarketequilibriumshowsthemarket -clearing________and
market-clearing________.
A) price;deposit
B) interestrate;deposit
C) price;interestrate
D) interestrate;premium
Answer: C
QuesStatus:New

4) Whenthepriceofabondisabovetheequilibriumprice,thereisanexcess________bondsand
pricewill________.
A) demandfor;rise
B) demandfor;fall
C) supplyof;fall
D) supplyof;rise
Answer: C
QuesStatus:PreviousEdition

5) Whenthepriceofabondis________theequilibriumprice,thereisanexcessdemandfor
bondsandpricewill________.
A) above;rise
B) above;fall
C) below;fall
D) below;rise
Answer: D
QuesStatus:PreviousEdition

6) Whentheinterestrateonabondisabovetheequilibriuminterestrate,inthebondmarket
thereisexcess________andtheinterestratewill________.
A) demand;rise
B) demand;fall
C) supply;fall
D) supply;rise
Answer: B
QuesStatus:PreviousEdition

Chapter5 TheBehaviorofInterestRates105

7) Whentheinterestrateonabondis________theequilibriuminterestrate,inthebondmarket
thereisexcess________andtheinterestratewill________.
A) above;demand;rise
B) above;demand;fall
C) below;supply;fall
D) above;supply;rise
Answer: B
QuesStatus:PreviousEdition

8) Asituationinwhichthequantityofbondssuppliedexceedsthequantityofbondsdemanded
iscalledaconditionofexcesssupply;becausepeoplewanttosell________bondsthanothers
wanttobuy,thepriceofbondswill________.
A) fewer;fall
B) fewer;rise
C) more;fall
D) more;rise
Answer: C
QuesStatus:PreviousEdition

9) Ifthepriceofbondsisset________theequilibriumprice,thequantityofbondsdemanded
exceedsthequantityofbondssupplied,aconditioncalledexcess________.
A) above;demand
B) above;supply
C) below;demand
D) below;supply
Answer: C
QuesStatus:PreviousEdition

5.3 ChangesinEquilibriumInterestRates
1) Amovementalongthebonddemandorsupplycurveoccurswhen________changes.
A) bondprice
B) income
C) wealth
D) expectedreturn
Answer: A
QuesStatus:New

106MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

2) Whenthepriceofabonddecreases,allelseequal,thebonddemandcurve________.
A) shiftsright
B) shiftsleft
C) doesnotshift
D) inverts
Answer: C
QuesStatus:New

3) Everythingelseheldconstant,whenhouseholdssaveless,wealthandthedemandforbonds
________andthebonddemandcurveshifts________.
A) increase;right
B) increase;left
C) decrease;right
D) decrease;left
Answer: D
QuesStatus:New

4) Holdingtheexpectedreturnonbondsconstant,anincreaseintheexpectedreturnoncommon
stockswould________thedemandforbonds,shiftingthedemandcurvetothe________.
A) decrease;left
B) decrease;right
C) increase;left
D) increase;right
Answer: A
QuesStatus:PreviousEdition

5) Everythingelseheldconstant,ifinterestratesareexpectedtofallinthefuture,thedemandfor
long-termbondstoday________andthedemandcurveshiftstothe________.
A) rises;right
B) rises;left
C) falls;right
D) falls;left
Answer: A
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates107

6) Everythingelseheldconstant,anincreaseinexpectedinflation,lowerstheexpectedreturnon
________comparedto________assets.
A) bonds;financial
B) bonds;real
C) physical;financial
D) physical;real
Answer: B
QuesStatus:New

7) Thereductionofbrokeragecommissionsfortradingcommonstocksthatoccurredin1975
causedthedemandforbondsto________andthedemandcurvetoshifttothe________.
A) fall;right
B) fall,left
C) rise;right
D) rise;left
Answer: B
QuesStatus:PreviousEdition

8) Everythingelseheldconstant,whenstockpricesbecomelessvolatile,thedemandcurvefor
bondsshiftstothe________andtheinterestrate________.
A) right;rises
B) right;falls
C) left;falls
D) left;rises
Answer: D
QuesStatus:PreviousEdition

9) Everythingelseheldconstant,whenstockpricesbecome________volatile,thedemandcurve
forbondsshiftstothe________andtheinterestrate________.
A) more;right;rises
B) more;right;falls
C) less;left;falls
D) less;left;doesnotchange
Answer: B
QuesStatus:Revised

108MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

10) Everythingelseheldconstant,anincreaseintheriskinessofbondsrelativetoalternativeassets
causesthedemandforbondsto________andthedemandcurvetoshifttothe________.
A) rise;right
B) rise;left
C) fall;right
D) fall;left
Answer: D
QuesStatus:Revised

11) Everythingelseheldconstant,whenbondsbecomelesswidelytraded,andasaconsequence
themarketbecomeslessliquid,thedemandcurveforbondsshiftstothe________andthe
interestrate________.
A) right;rises
B) right;falls
C) left;falls
D) left;rises
Answer: D
QuesStatus:Revised

12) Everythingelseheldconstant,anincreaseintheliquidityofbondsresultsina________in
demandforbondsandthedemandcurveshiftstothe________.
A) rise;right
B) rise;left
C) fall;right
D) fall;left
Answer: A
QuesStatus:Revised

13) Factorsthatdecreasethedemandforbondsinclude
A) anincreaseinthevolatilityofstockprices.
B) adecreaseintheexpectedreturnsonstocks.
C) adecreaseintheinflationrate.
D) adecreaseintheriskinessofstocks.
Answer: D
QuesStatus:PreviousEdition

Chapter5 TheBehaviorofInterestRates109

14) Duringbusinesscycleexpansionswhenincomeandwealtharerising,thedemandforbonds
________andthedemandcurveshiftstothe________,everythingelseheldconstant.
A) falls;right
B) falls;left
C) rises;right
D) rises;left
Answer: C
QuesStatus:Revised

15) Factorsthatcancausethesupplycurveforbondstoshifttotherightinclude
A) anexpansioninoveralleconomicactivity.
B) adecreaseinexpectedinflation.
C) adecreaseingovernmentdeficits.
D) abusinesscyclerecession.
Answer: A
QuesStatus:Revised

16) Duringarecession,thesupplyofbonds________andthesupplycurveshiftstothe________,
everythingelseheldconstant.
A) increases;left
B) increases;right
C) decreases;left
D) decreases;right
Answer: C
QuesStatus:Revised

17) Anincreaseintheexpectedinflationratecausesthesupplyofbondsto________andthe
supplycurvetoshifttothe________,everythingelseheldconstant.
A) increase;left
B) increase;right
C) decrease;left
D) decrease;right
Answer: B
QuesStatus:Revised

110MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

18) Whentheexpectedinflationrateincreases,therealcostofborrowing________andbond
supply________,everythingelseheldconstant.
A) increases;increases
B) increases;decreases
C) decreases;increases
D) decreases;decreases
Answer: C
QuesStatus:New

19) Highergovernmentdeficits________thesupplyofbondsandshiftthesupplycurvetothe
________,everythingelseheldconstant.
A) increase;left
B) increase;right
C) decrease;left
D) decrease;right
Answer: B
QuesStatus:PreviousEdition

20) Whentheinflationrateisexpectedtoincrease,the________forbondsfalls,whilethe________
curveshiftstotheright,everythingelseheldconstant.
A) demand;demand
B) demand;supply
C) supply;demand
D) supply;supply
Answer: B
QuesStatus:Revised

21) Everythingelseheldconstant,whentheinflationrateisexpectedtorise,interestrateswill
_________;thisresulthasbeentermedthe________.
A) fall;Keyneseffect
B) fall;Fishereffect
C) rise;Keyneseffect
D) rise;Fishereffect
Answer: D
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates111

22) TheeconomistIrvingFisher,afterwhomtheFishereffectisnamed,explainedwhyinterest
rates________astheexpectedrateofinflation________,everythingelseheldconstant.
A) rise;increases
B) rise;stabilizes
C) fall;stabilizes
D) fall;increases
Answer: A
QuesStatus:Revised

23) Everythingelseheldconstant,duringabusinesscycleexpansion,thesupplyofbondsshiftsto
the________asbusinessesperceivemoreprofitableinvestmentopportunities,whilethe
demandforbondsshiftstothe________asaresultoftheincreaseinwealthgeneratedbythe
economicexpansion.
A) right;left
B) right;right
C) left;left
D) left;right
Answer: B
QuesStatus:Revised

24) Whentheinterestratechanges,
A) thedemandcurveforbondsshiftstotheright.
B) thedemandcurveforbondsshiftstotheleft.
C) thesupplycurveforbondsshiftstotheright.
D) itisbecauseeitherthedemandorthesupplycurvehasshifted.
Answer: D
QuesStatus:PreviousEdition

25) Whentheinterestratefalls,eitherthedemandforbonds________orthesupplyofbonds
________.
A) increased;increased
B) increased;decreased
C) decreased;decreased
D) decreased;increased
Answer: B
QuesStatus:Revised

112MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

26) Adecreaseinthebrokeragecommissionsinthehousingmarketfrom6%to5%ofthesales
pricewillshiftthe________curveforbondstothe________,everythingelseheldconstant.
A) demand;right
B) demand;left
C) supply;right
D) supply;left
Answer: B
QuesStatus:Revised

27) Whenrarecoinpricesbecomevolatile,the________curveforbondsshiftstothe________,
everythingelseheldconstant.
A) demand;right
B) demand;left
C) supply;right
D) supply;left
Answer: A
QuesStatus:Revised

28) Ifpeopleexpectrealestatepricestoincreasesignificantly,the________curveforbondswill
shifttothe________,everythingelseheldconstant.
A) demand;right
B) demand;left
C) supply;left
D) supply;right
Answer: B
QuesStatus:Revised

29) Everythingelseheldconstant,whenpricesintheartmarketbecomemoreuncertain,
A) thedemandcurveforbondsshiftstotheleftandtheinterestraterises.
B) thedemandcurveforbondsshiftstotheleftandtheinterestratefalls.
C) thedemandcurveforbondsshiftstotherightandtheinterestratefalls.
D) thesupplycurveforbondsshiftstotherightandtheinterestratefalls.
Answer: C
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates113

30) Whenthegovernmenthasasurplus,asoccurredinthelate1990s,the________curveofbonds
shiftstothe________,everythingelseheldconstant.
A) supply;right
B) supply;left
C) demand;right
D) demand;left
Answer: B
QuesStatus:New

31) Whentheexpectedinflationrateincreases,thedemandforbonds________,thesupplyof
bonds________,andtheinterestrate________,everythingelseheldconstant.
A) increases;increases;rises
B) decreases;decreases;falls
C) increases;decreases;falls
D) decreases;increases;rises
Answer: D
QuesStatus:Revised

32) Whenaneconomygrowsoutofarecession,normallythedemandforbonds________andthe
supplyofbonds________,everythingelseheldconstant.
A) increases;increases
B) increases;decreases
C) decreases;decreases
D) decreases;increases
Answer: A
QuesStatus:Revised

33) Whentheeconomyslipsintoarecession,normallythedemandforbonds________,the
supplyofbonds________,andtheinterestrate________,everythingelseheldconstant.
A) increases;increases;rises
B) decreases;decreases;falls
C) increases;decreases;falls
D) decreases;increases;rises
Answer: B
QuesStatus:Revised

114MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

34) Inthe1990sJapanhadthelowestinterestratesintheworldduetoacombinationof
A) inflationandrecession.
B) deflationandexpansion.
C) inflationandexpansion.
D) deflationandrecession.
Answer: D
QuesStatus:Revised

35) Deflationcausesthedemandforbondsto________,thesupplyofbondsto________,and
bondpricesto________,everythingelseheldconstant.
A) increase;increase;increase
B) increase;decrease;increase
C) decrease;increase;increase
D) decrease;decrease;increase
Answer: B
QuesStatus:Revised

36) Inthefigureabove,afactorthatcouldcausethesupplyofbondstoshifttotherightis:
A) adecreaseingovernmentbudgetdeficits.
B) adecreaseinexpectedinflation.
C) arecession.
D) abusinesscycleexpansion.
Answer: D
QuesStatus:PreviousEdition

Chapter5 TheBehaviorofInterestRates115

37) Inthefigureabove,afactorthatcouldcausethedemandforbondstodecrease(shifttothe
left)is:
A) anincreaseintheexpectedreturnonbondsrelativetootherassets.
B) adecreaseintheexpectedreturnonbondsrelativetootherassets.
C) anincreaseinwealth.
D) areductionintheriskinessofbondsrelativetootherassets.
Answer: B
QuesStatus:PreviousEdition

38) Inthefigureabove,thepriceofbondswouldfallfromP 1 toP2

A) inflationisexpectedtoincreaseinthefuture.
B) interestratesareexpectedtofallinthefuture.
C) theexpectedreturnonbondsrelativetootherassetsisexpectedtoincreaseinthefuture.
D) theriskinessofbondsfallsrelativetootherassets.
Answer: A
QuesStatus:PreviousEdition

39) Inthefigureabove,afactorthatcouldcausethesupplyofbondstoincrease(shifttotheright)
is:
A) adecreaseingovernmentbudgetdeficits.
B) adecreaseinexpectedinflation.
C) expectationsofmoreprofitableinvestmentopportunities.
D) abusinesscyclerecession.
Answer: C
QuesStatus:Revised

116MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

40) Inthefigureabove,afactorthatcouldcausethedemandforbondstoshifttotherightis:
A) anincreaseintheriskinessofbondsrelativetootherassets.
B) anincreaseintheexpectedrateofinflation.
C) expectationsoflowerinterestratesinthefuture.
D) adecreaseinwealth.
Answer: C
QuesStatus:Revised

41) Inthefigureabove,thepriceofbondswouldfallfromP 2 toP1 if

A) thereisabusinesscyclerecession.
B) thereisabusinesscycleexpansion.
C) inflationisexpectedtoincreaseinthefuture.
D) inflationisexpectedtodecreaseinthefuture.
Answer: B
QuesStatus:New

42) WhatistheimpactoninterestrateswhentheFederalReservedecreasesthemoneysupplyby
sellingbondstothepublic?
Answer: Bondsupplyincreasesandthebondsupplycurveshiftstotheright.Thenew
equilibriumbondpriceislowerandthusinterestrateswillincrease.
QuesStatus:New

43) UsedemandandsupplyanalysistoexplainwhyanexpectationofFedratehikeswouldcause
Treasurypricestofall.
Answer: Theexpectedreturnonbondswoulddecreaserelativetootherassetsresultingina
decreaseinthedemandforbonds.Theleftwardshiftofthebonddemandcurveresults
inanewlowerequilibriumpriceforbonds.
QuesStatus:New

5.4 SupplyandDemandintheMarketforMoney:TheLiquidityPreference
Framework
1) Thebondsupplyanddemandframeworkiseasiertousewhenanalyzingtheeffectsof
changesin________,whiletheliquiditypreferenceframeworkprovidesasimpleranalysisof
theeffectsfromchangesinincome,thepricelevel,andthesupplyof________.
A) expectedinflation;bonds
B) expectedinflation;money
C) governmentbudgetdeficits;bonds
D) governmentbudgetdeficits;money
Answer: B
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates117

2) InhisLiquidityPreferenceFramework,Keynesassumedthatmoneyhasazerorateofreturn;
thus,
A) wheninterestratesrise,theexpectedreturnonmoneyfallsrelativetotheexpected
returnonbonds,causingthedemandformoneytofall.
B) wheninterestratesrise,theexpectedreturnonmoneyfallsrelativetotheexpected
returnonbonds,causingthedemandformoneytorise.
C) wheninterestratesfall,theexpectedreturnonmoneyfallsrelativetotheexpectedreturn
onbonds,causingthedemandformoneytofall.
D) wheninterestratesfall,theexpectedreturnonmoneyfallsrelativetotheexpectedreturn
onbonds,causingthedemandformoneytorise.
Answer: A
QuesStatus:PreviousEdition

3) InKeynessliquiditypreferenceframework,individualsareassumedtoholdtheirwealthin
twoforms:
A) realassetsandfinancialassets.
B) stocksandbonds.
C) moneyandbonds.
D) moneyandgold.
Answer: C
QuesStatus:PreviousEdition

4) Keynesassumedthatmoneyhas________rateofreturn.
A) apositive
B) anegative
C) azero
D) anincreasing
Answer: C
QuesStatus:New

5) InKeynessliquiditypreferenceframework,astheexpectedreturnonbondsincreases
(holdingeverythingelseunchanged),theexpectedreturnonmoney________,causingthe
demandfor________tofall.
A) falls;bonds
B) falls;money
C) rises;bonds
D) rises;money
Answer: B
QuesStatus:PreviousEdition

118MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

6) InKeynessliquiditypreferenceframework,
A) thedemandforbondsmustequalthesupplyofmoney.
B) thedemandformoneymustequalthesupplyofbonds.
C) anexcessdemandofbondsimpliesanexcessdemandformoney.
D) anexcesssupplyofbondsimpliesanexcessdemandformoney.
Answer: D
QuesStatus:PreviousEdition

7) Theopportunitycostofholdingmoneyis
A) thelevelofincome.
B) thepricelevel.
C) theinterestrate.
D) thediscountrate.
Answer: C
QuesStatus:Revised

8) Ifthereisexcessdemandformoney,thereis
A) excessdemandforbonds.
B) equilibriuminthebondmarket.
C) excesssupplyofbonds.
D) toomuchmoney.
Answer: C
QuesStatus:Revised

9) Anincreaseintheinterestrate
A) increasesthedemandformoney.
B) increasesthequantityofmoneydemanded.
C) decreasesthedemandformoney.
D) decreasesthequantityofmoneydemanded.
Answer: D
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates119

10) Ifthereisanexcesssupplyofmoney
A) individualssellbonds,causingtheinterestratetorise.
B) individualssellbonds,causingtheinterestratetofall.
C) individualsbuybonds,causinginterestratestofall.
D) individualsbuybonds,causinginterestratestorise.
Answer: C
QuesStatus:Revised

11) Whentheinterestrateisabovetheequilibriuminterestrate,thereisanexcess________money
andtheinterestratewill________.
A) demandfor;rise
B) demandfor;fall
C) supplyof;fall
D) supplyof;rise
Answer: C
QuesStatus:Revised

12) Inthemarketformoney,aninterestratebelowequilibriumresultsinanexcess________
moneyandtheinterestratewill________.
A) demandfor;rise
B) demandfor;fall
C) supplyof;fall
D) supplyof;rise
Answer: A
QuesStatus:Revised

5.5 ChangesinEquilibriumInterestRatesintheLiquidityPreferenceFramework
1) IntheKeynesianliquiditypreferenceframework,anincreaseintheinterestratecausesthe
demandcurveformoneyto________,everythingelseheldconstant.
A) shiftright
B) shiftleft
C) staywhereitis
D) invert
Answer: C
QuesStatus:New

120MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

2) Alowerlevelofincomecausesthedemandformoneyto________andtheinterestrateto
________,everythingelseheldconstant.
A) decrease;decrease
B) decrease;increase
C) increase;decrease
D) increase;increase
Answer: A
QuesStatus:Revised

3) Whenrealincome________,thedemandcurveformoneyshiftstothe________andthe
interestrate________,everythingelseheldconstant.
A) falls;right;rises
B) rises;right;rises
C) falls;left;rises
D) rises;left;rises
Answer: B
QuesStatus:Revised

4) Abusinesscycleexpansionincreasesincome,causingmoneydemandto________andinterest
ratesto________,everythingelseheldconstant.
A) increase;increase
B) increase;decrease
C) decrease;decrease
D) decrease;increase
Answer: A
QuesStatus:New

5) IntheKeynesianliquiditypreferenceframework,ariseinthepricelevelcausesthedemand
formoneyto________andthedemandcurvetoshifttothe________,everythingelseheld
constant.
A) increase;left
B) increase;right
C) decrease;left
D) decrease;right
Answer: B
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates121

6) Whenthepricelevel________,thedemandcurveformoneyshiftstothe________andthe
interestrate________,everythingelseheldconstant.
A) falls;left;falls
B) rises;right;falls
C) falls;left;rises
D) rises;right;rises
Answer: D
QuesStatus:Revised

7) Ariseinthepricelevelcausesthedemandformoneyto________andtheinterestrateto
________,everythingelseheldconstant.
A) decrease;decrease
B) decrease;increase
C) increase;decrease
D) increase;increase
Answer: D
QuesStatus:Revised

8) Adeclineintheexpectedinflationratecausesthedemandformoneyto________andthe
demandcurvetoshifttothe________,everythingelseheldconstant.
A) decrease;right
B) decrease;left
C) increase;right
D) increase;left
Answer: B
QuesStatus:Revised

9) Intheliquiditypreferenceframework,aone-timeincreaseinthemoneysupplyresultsina
priceleveleffect.Themaximumimpactofthepriceleveleffectoninterestratesoccurs
A) atthemomentthepricelevelhitsitspeak(stopsrising)becauseboththepriceleveland
expectedinflationeffectsareatwork.
B) immediatelyafterthepricelevelbeginstorise,becauseboththepricelevelandexpected
inflationeffectsareatwork.
C) atthemomenttheexpectedinflationratehitsitspeak.
D) atthemomenttheinflationratehitsitpeak.
Answer: A
QuesStatus:Revised

122MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

10) Interestratesincreasedcontinuouslyduringthe1970s.Themostlikelyexplanationis
A) bankingfailuresthatreducedthemoneysupply.
B) ariseinthelevelofincome.
C) therepeatedboutsofrecessionandexpansion.
D) increasingexpectedratesofinflation.
Answer: D
QuesStatus:Revised

11) WhentheFeddecreasesthemoneystock,themoneysupplycurveshiftstothe________and
theinterestrate________,everythingelseheldconstant.
A) right;rises
B) right;falls
C) left;falls
D) left;rises
Answer: D
QuesStatus:Revised

12) WhentheFed________themoneystock,themoneysupplycurveshiftstothe________and
theinterestrate________,everythingelseheldconstant.
A) decreases;right;rises
B) increases;right;falls
C) decreases;left;falls
D) increases;left;rises
Answer: B
QuesStatus:Revised

13) Whenthepricelevelfalls,the________curvefornominalmoney________,andinterestrates
________,everythingelseheldconstant.
A) demand;decreases;fall
B) demand;increases;rise
C) supply;increases;rise
D) supply;decreases;fall
Answer: A
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates123

14) ________inthemoneysupplycreatesexcess________money,causinginterestratesto
________,everythingelseheldconstant.
A) adecrease;demandfor;rise
B) anincrease;demandfor;fall
C) anincrease;supplyof;rise
D) adecrease;supplyof;fall
Answer: A
QuesStatus:Revised

15) ________inthemoneysupplycreatesexcessdemandfor________,causinginterestratesto
________,everythingelseheldconstant.
A) anincrease;money;rise
B) anincrease;bonds;fall
C) adecrease;bonds;rise
D) adecrease;money;fall
Answer: B
QuesStatus:Revised

16) Inthefigureabove,onefactornotresponsibleforthedeclineinthedemandformoneyis
A) adeclinethepricelevel.
B) adeclineinincome.
C) anincreaseinincome.
D) adeclineintheexpectedinflationrate.
Answer: C
QuesStatus:PreviousEdition

124MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

17) Inthefigureabove,thedecreaseintheinterestratefromi 1 toi2 canbeexplainedby

A) adecreaseinmoneygrowth.
B) adeclineintheexpectedpricelevel.
C) anincreaseinincome.
D) anincreaseintheexpectedpricelevel.
Answer: B
QuesStatus:Revised

18) Inthefigureabove,thefactorresponsibleforthedeclineintheinterestrateis
A) adeclinethepricelevel.
B) adeclineinincome.
C) anincreaseinthemoneysupply.
D) adeclineintheexpectedinflationrate.
Answer: C
QuesStatus:PreviousEdition

19) Inthefigureabove,thedecreaseintheinterestratefromi 1 toi2 canbeexplainedby

A) adecreaseinmoneygrowth.
B) anincreaseinmoneygrowth.
C) adeclineintheexpectedpricelevel.
D) anincreaseinincome.
Answer: B
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates125

20) Whenthegrowthrateofthemoneysupplyincreases,interestratesendupbeingpermanently
lowerif
A) theliquidityeffectislargerthantheothereffects.
B) thereisfastadjustmentofexpectedinflation.
C) thereisslowadjustmentofexpectedinflation.
D) theexpectedinflationeffectislargerthantheliquidityeffect.
Answer: A
QuesStatus:PreviousEdition

21) Whenthegrowthrateofthemoneysupplyisincreased,interestrateswillfallimmediatelyif
theliquidityeffectis_________thantheothermoneysupplyeffectsandthereis________
adjustmentofexpectedinflation.
A) larger;fast
B) larger;slow
C) smaller;slow
D) smaller;fast
Answer: B
QuesStatus:PreviousEdition

22) IftheFedwantstopermanentlylowerinterestrates,thenitshouldraisetherateofmoney
growthif
A) thereisfastadjustmentofexpectedinflation.
B) thereisslowadjustmentofexpectedinflation.
C) theliquidityeffectissmallerthantheexpectedinflationeffect.
D) theliquidityeffectislargerthantheothereffects.
Answer: D
QuesStatus:PreviousEdition

23) MiltonFriedmancontendsthatitisentirelypossiblethatwhenthemoneysupplyrises,
interestratesmay________ifthe________effectismorethanoffsetbychangesinincome,the
pricelevel,andexpectedinflation.
A) fall;liquidity
B) fall;risk
C) rise;liquidity
D) rise;risk
Answer: C
QuesStatus:PreviousEdition

126MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

24) Ofthefoureffectsoninterestratesfromanincreaseinthemoneysupply,theonethatworks
intheoppositedirectionoftheotherthreeisthe
A) liquidityeffect.
B) incomeeffect.
C) priceleveleffect.
D) expectedinflationeffect.
Answer: A
QuesStatus:PreviousEdition

25) Ofthefoureffectsoninterestratesfromanincreaseinthemoneysupply,theinitialeffectis,
generally,the
A) incomeeffect.
B) liquidityeffect.
C) priceleveleffect.
D) expectedinflationeffect.
Answer: B
QuesStatus:PreviousEdition

26) Iftheliquidityeffectissmallerthantheothereffects,andtheadjustmenttoexpectedinflation
isslow,thenthe
A) interestratewillfall.
B) interestratewillrise.
C) interestratewillinitiallyfallbuteventuallyclimbabovetheinitiallevelinresponsetoan
increaseinmoneygrowth.
D) interestratewillinitiallyrisebuteventuallyfallbelowtheinitiallevelinresponsetoan
increaseinmoneygrowth.
Answer: C
QuesStatus:PreviousEdition

27) Iftheliquidityeffectissmallerthantheothereffects,andtheadjustmenttoexpectedinflation
isimmediate,thenthe
A) interestratewillfall.
B) interestratewillrise.
C) interestratewillfallimmediatelybelowtheinitiallevelwhenthemoneysupplygrows.
D) interestratewillriseimmediatelyabovetheinitiallevelwhenthemoneysupplygrows.
Answer: D
QuesStatus:PreviousEdition

Chapter5 TheBehaviorofInterestRates127

28) Inthefigureabove,illustratestheeffectofanincreasedrateofmoneysupplygrowthattime
period0.Fromthefigure,onecanconcludethatthe
A) liquidityeffectissmallerthantheexpectedinflationeffectandinterestratesadjust
quicklytochangesinexpectedinflation.
B) liquidityeffectislargerthantheexpectedinflationeffectandinterestratesadjustquickly
tochangesinexpectedinflation.
C) liquidityeffectislargerthantheexpectedinflationeffectandinterestratesadjustslowly
tochangesinexpectedinflation.
D) liquidityeffectissmallerthantheexpectedinflationeffectandinterestratesadjust
slowlytochangesinexpectedinflation.
Answer: A
QuesStatus:PreviousEdition

29) Inthefigureabove,illustratestheeffectofanincreasedrateofmoneysupplygrowthattime
period0.Fromthefigure,onecanconcludethatthe
A) Fishereffectisdominatedbytheliquidityeffectandinterestratesadjustslowlyto
changesinexpectedinflation.
B) liquidityeffectisdominatedbytheFishereffectandinterestratesadjustslowlyto
changesinexpectedinflation.
C) liquidityeffectisdominatedbytheFishereffectandinterestratesadjustquicklyto
changesinexpectedinflation.
D) Fishereffectissmallerthantheexpectedinflationeffectandinterestratesadjustquickly
tochangesinexpectedinflation.
Answer: C
QuesStatus:PreviousEdition

128MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

30) Thefigureaboveillustratestheeffectofanincreasedrateofmoneysupplygrowthattime
periodT0 .Fromthefigure,onecanconcludethatthe
A) liquidityeffectissmallerthantheexpectedinflationeffectandinterestratesadjust
quicklytochangesinexpectedinflation.
B) liquidityeffectislargerthantheexpectedinflationeffectandinterestratesadjustquickly
tochangesinexpectedinflation.
C) liquidityeffectislargerthantheexpectedinflationeffectandinterestratesadjustslowly
tochangesinexpectedinflation.
D) liquidityeffectissmallerthantheexpectedinflationeffectandinterestratesadjust
slowlytochangesinexpectedinflation.
Answer: C
QuesStatus:Revised

31) Thefigureaboveillustratestheeffectofanincreasedrateofmoneysupplygrowthattime
periodT0 .Fromthefigure,onecanconcludethatthe
A) Fishereffectisdominatedbytheliquidityeffectandinterestratesadjustslowlyto
changesinexpectedinflation.
B) liquidityeffectisdominatedbytheFishereffectandinterestratesadjustslowlyto
changesinexpectedinflation.
C) liquidityeffectisdominatedbytheFishereffectandinterestratesadjustquicklyto
changesinexpectedinflation.
D) Fishereffectissmallerthantheexpectedinflationeffectandinterestratesadjustquickly
tochangesinexpectedinflation.
Answer: A
QuesStatus:Revised

Chapter5 TheBehaviorofInterestRates129

32) Thefigureaboveillustratestheeffectofanincreasedrateofmoneysupplygrowthattime
periodT0 .Fromthefigure,onecanconcludethatthe
A) liquidityeffectissmallerthantheexpectedinflationeffectandinterestratesadjust
quicklytochangesinexpectedinflation.
B) liquidityeffectislargerthantheexpectedinflationeffectandinterestratesadjustquickly
tochangesinexpectedinflation.
C) liquidityeffectislargerthantheexpectedinflationeffectandinterestratesadjustslowly
tochangesinexpectedinflation.
D) liquidityeffectissmallerthantheexpectedinflationeffectandinterestratesadjust
slowlytochangesinexpectedinflation.
Answer: D
QuesStatus:Revised

33) Thefigureaboveillustratestheeffectofanincreasedrateofmoneysupplygrowthattime
periodT0 .Fromthefigure,onecanconcludethatthe
A) Fishereffectisdominatedbytheliquidityeffectandinterestratesadjustslowlyto
changesinexpectedinflation
B) liquidityeffectisdominatedbytheFishereffectandinterestratesadjustslowlyto
changesinexpectedinflation
C) liquidityeffectisdominatedbytheFishereffectandinterestratesadjustquicklyto
changesinexpectedinflation
D) Fishereffectissmallerthantheexpectedinflationeffectandinterestratesadjustquickly
tochangesinexpectedinflation
Answer: A
QuesStatus:Revised

34) Usingtheliquiditypreferenceframework,whatwillhappentointerestratesiftheFed
increasesthemoneysupply?
Answer: TheFedsactionsshiftthemoneysupplycurvetotheright.Thenewequilibrium
interestratewillbelowerthanitwaspreviously.
QuesStatus:New

130MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

35) Usingtheliquiditypreferenceframework,showwhathappenstointerestratesduringa
businesscyclerecession.
Answer: Duringabusinesscyclerecession,incomewillfall.Thiscausesthemoneydemand
curvetoshifttotheleft.Theresultingequilibriumwillbeatalowerinterestrate.

QuesStatus:New

5.6 WebAppendix1:ModelsofAssetPricing
1) Theriskinessofanassetismeasuredby
A) themagnitudeofitsreturn.
B) theabsolutevalueofanychangeintheassetsprice.
C) thestandarddeviationofitsreturn.
D) riskisimpossibletomeasure.
Answer: C
QuesStatus:Revised

2) Ahigher________meansthatanassetsreturnismoresensitivetochangesinthevalueofthe
marketportfolio.
A) alpha
B) beta
C) CAPM
D) APT
Answer: B
QuesStatus:New

Chapter5 TheBehaviorofInterestRates131

3) Theriskinessofanassetthatisuniquetotheparticularassetis
A) systematicrisk.
B) portfoliorisk.
C) investmentrisk.
D) nonsystematicrisk.
Answer: D
QuesStatus:Revised

4) Theriskofawell-diversifiedportfoliodependsonlyonthe________riskoftheassetsinthe
portfolio.
A) systematic
B) nonsystematic
C) portfolio
D) investment
Answer: A
QuesStatus:New

5) IncontrasttotheCAPM,theAPTassumesthattherecanbeseveralsourcesof________that
cannotbeeliminatedthroughdiversification.
A) nonsystematicrisk
B) systematicrisk
C) creditrisk
D) arbitraryrisk
Answer: B
QuesStatus:New

5.7 WebAppendix2:ApplyingtheAssetMarketApproachtoaCommodityMarket:
TheCaseofGold
1) Anincreaseintheexpectedinflationratewill________the________forgold,________its
price,everythingelseheldconstant.
A) increase;demand;increasing
B) decrease;demand;decreasing
C) increase;supply;increasing
D) decrease;supply;increasing
Answer: A
QuesStatus:Revised

132MishkinEconomicsofMoney,Banking,andFinancialMarkets,EighthEdition

2) Areturntothegoldstandard,thatis,usinggoldformoneywill________the________for
gold,________itsprice,everythingelseheldconstant.
A) increase;demand;increasing
B) decrease;demand;decreasing
C) increase;supply;increasing
D) decrease;supply;increasing
Answer: A
QuesStatus:Revised

3) DiscoveryofnewgoldinAlaskawill________the________ofgold,________itsprice,
everythingelseheldconstant.
A) increase;demand;increasing
B) decrease;demand;decreasing
C) decrease;supply;increasing
D) increase;supply;decreasing
Answer: D
QuesStatus:Revised

4) Whengoldpricesbecomemorevolatile,the________curveforgoldshiftstothe________;
________thepriceofgold.
A) supply;right;increasing
B) supply;left;increasing
C) demand;right;decreasing
D) demand;left;decreasing
Answer: D
QuesStatus:New

5.8 WebAppendix3:LoanableFundsFramework
1) Intheloanablefundsframework,the________curveofbondsisequivalenttothe________
curveofloanablefunds.
A) demand;demand
B) demand;supply
C) supply;supply
D) supply;equilibrium
Answer: B
QuesStatus:New

Chapter5 TheBehaviorofInterestRates133

2) Intheloanablefundsframework,the________ismeasuredontheverticalaxis.
A) priceofbonds
B) interestrate
C) quantityofbonds
D) quantityofloanablefunds
Answer: B
QuesStatus:New