Problem Set 3
Problem Set 3
Econ 333 (01) Summer 2002
(Dr. Tin-Chun Lin)
1. When stock prices become ____ volatile, the demand curve for bonds shifts to the ____ and the interest rate _____.
A) More; right; rises.
B) More; left; falls.
C) Less; left; falls.
D) Less; left; rises.
E) Less; right; falls.
(Answer: (D))
2. When the growth rate of the money supply decreases, interest rates end up being permanently lower if
A) The liquidity effect is larger than the other effects.
B) There is fast adjustment of expected inflation.
C) There is slow adjustment of expected inflation.
D) The expected inflation effect is larger than the liquidity effect.
(Answer: (D))
3. A decrease in the expected rate of inflation will ___ the expected return on bonds relative to the that on ___ assets, and shift the ___ curve to the left.
A) Reduce; financial; demand
B) Reduce; real; demand
C) Raise; financial; supply
D) Raise; real; supply
E) Raise; real; demand
(Answer: (E))
4. Factors that cause the demand curve for bonds to shift to the right include
A) An increase in the volatility of stock prices.
B) A decrease in the expected returns on stocks.
C) A decrease in the inflation rate.
D) All of the above.
E) Only (A) and (B) of the above.
(Answer: (D))
5. Factors that cause the demand curve for bonds to shift to the left include
A) An increase in the volatility of stock prices.
B) An increase in the expected returns on stocks.
C) A decrease in the inflation rate.
D) All of the above.
(Answer: (B))
6. 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.
(Answer: (C))
7. How might a sudden increase in people’s expectations of future real estate prices affect interest rates? (Answer: Interest rates would rise. A sudden increase in people’s expectations of future real estate prices raises the expected return on real estate relative to bonds, so the demand for bonds falls. The demand curve shifts to the left, and the equilibrium interest rate rises.)
8. When the exchange rate for the German mark changes from $0.3 to $0.5, then, holding everything else constant,
A) The mark has appreciated and German cars sole in the United States become more expensive.
B) The mark has appreciated and German cars sold in the United States become less expensive.
C) The mark has depreciated and American wheat sold in Germany becomes more expensive.
D) The mark has depreciated and American wheat sold in Germany becomes less expensive.
(Answer: (A))
9. If the 1996 inflation rate in Britain is 8 percent, and the inflation rate in France is 6 percent, then the theory of purchasing power parity predicts that, during 1996, the value of the British pound in terms of French francs wil
A) Rise by 5 percent.
B) Rise by 2 percent.
C) Fall by 5 percent.
D) Fall by 2 percent.
E) None of the above.
(Answer: (D))
10. When the exchange rate for the French franc changes form 10 francs to the dollar to 9 francs to the dollar, then
A) The franc has appreciated and the dollar has appreciated.
B) The franc has depreciated and the dollar has appreciated.
C) The franc has appreciated and the dollar has depreciated.
D) The franc has appreciated and the dollar has depreciated.
E) None of the above.
(Answer: (C))
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