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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. In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is:
2. If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.
3. When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________.
4. The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the
5. Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________.
6. If there is an excess supply of money
7. Pieces of property that serve as a store of value are called
8. If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the
9. An increase in the interest rate
10. Everything else held constant, an increase in expected inflation, lowers the expected return on________ compared to ________ assets.
11. Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion.
12. The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the
13. In the figure above, the decrease in the interest rate from i1 to i2 can be explained by
14. Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock________.
15. If housing prices are expected to increase, then, other things equal, the demand for houses will________ and that of Treasury bills will ________.
16. In the bond market, the bond demanders are the ________ and the bond suppliers are the________.
17. In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the
18. When the expected inflation rate increases, the real cost of borrowing ________ and bond supply________, everything else held constant.
19. 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 ________.
20. If brokerage commissions on stocks fall, everything else held constant, the demand for bonds________, the price of bonds ________, and the interest rate ________.
21. If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________.
22. In the figure above, the price of bonds would fall from P2 to P1 if
23. A movement along the bond demand or supply curve occurs when ________ changes.
24. Everything else held constant, when the inflation rate is expected to rise, interest rates will________; this result has been termed the ________.
25. Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.

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