51) What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public?
52) Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall.
5.4 Supply and Demand in the Market for Money: The Liquidity Preference Framework
1) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth intwo forms:
A) real assets and financial assets.
B) stocks and bonds.
C) money and bonds.
D) money and gold.
2) In Keynes's liquidity preference framework,
A) the demand for bonds must equal the supply of money.
B) the demand for money must equal the supply of bonds.
C) an excess demand of bonds implies an excess demand for money.
D) an
3) In Keynes's liquidity preference framework, if there is excess demand for money, there is
A) an excess demand for bonds.
B) equilibrium in the bond market.
C) an excess supply of bonds.
D) too much money.
4) 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 ________.
A) expected inflation; bonds
B) expected inflation; money
C) government budget deficits; bonds
D) government budget deficits; money
5) Keynes assumed that money has ________
A) a positive
B) a negative
C) a zero
D) an increasing
6) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus,
A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall.
D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise.
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