Question

3. Which of the following statements is (are) correct?
(x) If at some specific interest rate the quantity of money demanded is more than the quantity of money supplied, people will desire to sell interest-earning assets causing the interest rate to increase.
(y) Ceteris paribus, as the price of bonds falls, the interest rate on bonds falls.
(z) A decrease in the interest rate induces firms to borrow more, which will result in more investment spending and an increase in the aggregate demand for goods and services.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only
4. Which of the following responses would an economist expect to result from an increase in interest rates?
(x) Thelma puts less money into savings accounts and bonds because a higher interest rate scares her since it is always an indication that the assets are more risky.
(y) Since the interest expense on any given loan increases as the interest rate increases, Beatrice decides to purchase a smaller home than she had initially planned because her monthly income is fixed.
(z) Ford Motor Co decides to delay a bond sale that would have raised the necessary funds to expand a factory because it is now more expensive to borrow.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only
5. Which of the following statements is (are) correct?
(x) If the Fed targets the interest rate, it must reduce the money supply if the interest rate is above its target.
(y) In recent years, the Fed has conducted policy by setting a target for the federal funds rate.
(z) In recent years, the Fed has chosen to target interest rates rather than the money supply because the money supply is hard to measure with sufficient precision.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

aNS -3 ) (C) X and Z only.

Reason - : Statement X is Correct -: When the money demand is greater than the money supply , it means that people will sell the assets so as to hold more money at lower rates of interest.

Statement Y is incorrect -: There is an inverse relation between price and interest rate of bonds. As price falls, interest rate rises and vice versa.

Ans-4) (E) Z only.

Statement X is incorrect -: When interest rates are high , people put more money into bonds and saving accoubts as they receive more yield .

Statement Y is incorrect - : When interest rates increase , people tend not to borrow and the spending activities witness decline as now borrowing is expensive . It is not possibl to say whether she'll buy a small house because it might be the case that she doesn't buy a house as her income is fixed and cant afford the high interest payments .

Statement Z is correct -: Since it is expensive to borrow now due to high interest rates, it means bond prices are low (due to inverse relation between interest rates and bond prices) . Selling bonds at low prices will not raise much funds so it is of no use to sell them.

Ans-5) (D) Y and Z only .

Statement X IS INCORRECT - : because we change interest rate and not money supply to reduce or increase the money supply in the economy. The tool used is interest rate and not money supply to change interest rate.

Statement Y is correct - : Federal govt sets policy by Targetting the interest rates.

Statement Z is correct -: Yes, interest rate is the tool to manage money supply under monetary policy.