5.4 Supply and Demand in the Market for Money: The Liquidity Preference Framework
1) 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.
2) 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.
3) In Keynes's liquidity preference framework, if there is excess demand for money, there is
A) excess demand for bonds.
B) equilibrium in the bond market.
C) excess supply of bonds.
D) too much money.
4) The bond supply and demand framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________.
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money
5) Keynes assumed that money has ________ rate of return.
A) a positive
B) a negative
C) a zero
D) an increasing
6) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus,
A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
7) In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall.
A) falls; bonds
B) falls; money
C) rises; bonds
D) rises; money
8) The opportunity cost of holding money is
A) the level of income.
B) the price level.
C) the interest rate.
D) the discount rate.
9) An increase in the interest rate
A) increases the demand for money.
B) increases the quantity of money demanded.
C) decreases the demand for money.
D) decreases the quantity of money demanded.
10) 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.
11) When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________.
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
12) In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.
A) demand for; rise
B) demand for; fall
C) supply of; fall
D) supply of; rise
