CLEP Macroeconomics chapter practice4 questions

14 Money Market, Loanable Funds, and Interest Rates

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 4

Households and firms can hold money or interest-bearing assets. What measures the opportunity cost of holding money?

Money pays no interest, so what a holder gives up is the whole nominal return an interest-bearing asset would have paid. Choice B counts only the real part and drops the inflation loss. Choice A confuses what money buys with what holding it costs, D names only the erosion of purchasing power, and E is a bank regulation rather than a household's cost.
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C. The nominal interest forgone

Money pays no interest, so what a holder gives up is the whole nominal return an interest-bearing asset would have paid. Choice B counts only the real part and drops the inflation loss. Choice A confuses what money buys with what holding it costs, D names only the erosion of purchasing power, and E is a bank regulation rather than a household's cost.

Question 2

Question 2 of 4

The overall price level rises while real income is unchanged. The demand for money

The same basket of real transactions now takes more dollars, so households want larger balances at every interest rate. Choice A reverses that. Choice B changes the slope instead of the position, C denies that anything off the axes can shift the curve, and E ties the shift to a condition the relationship never imposes.
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D. shifts right as prices rise

The same basket of real transactions now takes more dollars, so households want larger balances at every interest rate. Choice A reverses that. Choice B changes the slope instead of the position, C denies that anything off the axes can shift the curve, and E ties the shift to a condition the relationship never imposes.

Question 3

Question 3 of 4

A central bank increases the money supply while money demand is unchanged. The nominal interest rate

Someone must be willing to hold the extra money, and only a lower opportunity cost persuades them. Choices A and D reverse the direction; D also assumes the effect vanishes on its own. Choice C forgets that bond prices and yields are two views of one adjustment, and B ties the nominal rate to inflation by a rule the money market does not impose.
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E. falls until people hold the larger stock

Someone must be willing to hold the extra money, and only a lower opportunity cost persuades them. Choices A and D reverse the direction; D also assumes the effect vanishes on its own. Choice C forgets that bond prices and yields are two views of one adjustment, and B ties the nominal rate to inflation by a rule the money market does not impose.

Question 4

Question 4 of 4

The loanable funds market is drawn with a single price on its vertical axis. That variable is

Saving and borrowing plans turn on the inflation-adjusted cost of funds, so the real rate sits on the vertical axis. Choice B is the money market's axis, a near miss worth remembering. Choice C belongs to the aggregate market, D to the labor market, and E to the currency market.
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A. the real interest rate

Saving and borrowing plans turn on the inflation-adjusted cost of funds, so the real rate sits on the vertical axis. Choice B is the money market's axis, a near miss worth remembering. Choice C belongs to the aggregate market, D to the labor market, and E to the currency market.

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