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ECON 20B ADDITIONAL PROBLEMS SET 8

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Econ 20B- Additional Problem Set I. MULTIPLE CHOICES. Choose the one alternative that best completes the statement to answer the question. 1 According to the theory of liquidity preference, the money supply a. and money demand are positively related to the interest rate. b. and money demand are negatively related to the interest rate. c. is negatively related to the interest rate while money demand is positively related to the interest rate. d. is independent of the interest rate, while money demand is negatively related to the interest rate. ANS: D PTS: 1 DIF: 2 REF: 34-1 2 The theory of liquidity preference assumes that the nominal supply of money is determined by the a. level of real GDP. b. rate of inflation. c. interest rate. d. the Federal Reserve. ANS: D PTS: 1 DIF: 1 REF: 34-1 Figure 34-1 3. Refer to Figure 34-1. If the current interest rate is 2 percent, a. there is excess money supply. b. people will sell more bonds, which drives interest rates up. c. as the money market moves to equilibrium, people will buy more goods. d. All of the above are correct. ANS: B PTS: 1 DIF: 2 REF: 34-1 4. Refer to Figure 34-1. At an interest rate of 4 percent there is excess a. money demand equal to the distance between a and b.

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b. money demand equal to the distance between b and c. c. money supply equal to the distance between b and a. d. money supply equal to the distance between c and b. ANS: C PTS: 1 DIF: 2 REF: 34-1 5 People will want to hold more money if the price level a. or the interest rate increases. b. or the interest rate decreases. c. increases or the interest rate decreases. d. decreases or the interest rate increases. ANS: C PTS: 1 DIF: 2 REF: 34-1 6 Which of the following shifts money demand to the right? a. an increase in the price level b. a decrease in the price level c. an increase in the interest rate d. a decrease in the interest rate ANS: A PTS: 1 DIF: 1 REF: 34-1 7 Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates?
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