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Money, Banking, and Financial Markets Practice Test: How Interest Rates Behave
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Interest rates are a vital tool of monetary policy that change in response to shifts in the economic climate, especially modifications to the monetary policy. Central banks set interest rates to control the cost of money, ensure monetary stability, and control the rates at which their national currency is traded. They may change interest rates based on economic data such as inflation rates, growth forecasts, and currency rates.  Interest rates can fluctuate according to the status of the economy. For example, if the economy is strong, interest rates will be high, and if the economy is weak,... Show more
Money, Banking, and Financial Markets Practice Test: How Interest Rates Behave
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25 Questions

1. Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.
2. In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________.
3. Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the
4. Everything else held constant, when prices in the art market become more uncertain,
5. In the liquidity preference framework, a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs
6. Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.
7. In the figure above, a factor that could cause the demand for bonds to shift to the right is:
8. Everything else held constant, when the inflation rate is expected to rise, interest rates will________; this result has been termed the ________.
9. Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.
10. Higher government deficits ________ the supply of bonds and shift the supply curve to the________, everything else held constant.
11. Factors that decrease the demand for bonds include
12. In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant.
13. A lower level of income causes the demand for money to ________ and the interest rate to________, everything else held constant.
14. In the figure above, one factor not responsible for the decline in the demand for money is
15. ________ in the money supply creates excess ________ money, causing interest rates to________, everything else held constant.
16. Holding all other factors constant, the quantity demanded of an asset is
17. In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.
18. The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.
19. If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________.
20. Pieces of property that serve as a store of value are called
21. Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________.
22. If there is an excess supply of money
23. When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________.
24. Everything else held constant, a decrease in wealth
25. Everything else held constant, when real estate prices are expected to decrease

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