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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 interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________.
2. In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________.
3. Everything else held constant, when households save less, wealth and the demand for bonds________ and the bond demand curve shifts ________.
4. In the figure above, the price of bonds would fall from P2 to P1 if
5. If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________.
6. In the 1990s Japan had the lowest interest rates in the world due to a combination of
7. 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.
8. 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 ________.
9. When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.
10. When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.
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. You would be more willing to buy AT&T bonds (holding everything else constant) if
13. A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________.
14. If brokerage commissions on stocks fall, everything else held constant, the demand for bonds________, the price of bonds ________, and the interest rate ________.
15. 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________.
16. Factors that decrease the demand for bonds include
17. Interest rates increased continuously during the 1970s. The most likely explanation is
18. An increase in the interest rate
19. If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant.
20. 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 ________.
21. When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant.
22. In Keynesʹs liquidity preference framework, if there is excess demand for money, there is
23. The demand for silver decreases, other things equal, when
24. The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ________ and the demand curve to shift to the ________.
25. When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________.

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