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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. If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.
2. If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________.
3. The demand for Picasso paintings rises (holding everything else equal) when
4. If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if
5. When the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant.
6. An increase in the interest rate
7. When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.
8. In the figure above, the factor responsible for the decline in the interest rate is
9. In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.
10. If the price of gold becomes less volatile, then, other things equal, the demand for stocks will________ and the demand for antiques will ________.
11. The interest rate falls when either the demand for bonds ________ or the supply of bonds________.
12. If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________.
13. When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant.
14. A rise in the price level causes the demand for money to ________ and the interest rate to________, everything else held constant.
15. During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant.
16. The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates________ as the expected rate of inflation ________, everything else held constant.
17. When the price level falls, the ________ curve for nominal money ________, and interest rates________, everything else held constant.
18. The opportunity cost of holding money is
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. Keynes assumed that money has ________ rate of return.
21. 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 ________.
22. In the figure above, the decrease in the interest rate from i1 to i2 can be explained by
23. In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable.
24. Everything else held constant, when the government has higher budget deficits
25. Everything else held constant, an increase in expected inflation, lowers the expected return on________ compared to ________ assets.

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