1.The uncertainty about the return an asset will earn is referred to as

A) liquidity.

B) risk.

C) time to maturity.

D) stochastic dominance.

2.The risk premium is

A) the amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset.

B) a measure of the riskiness of the overall economy in a domestic country compared with a foreign country.

C) the amount an investor must pay to insure his or her stock portfolio to protect against a fall in value.

D) the amount an investment bank charges to guarantee an annuity that pays a fixed rate of return in the future.

3.The ease and quickness with which an asset can be exchanged for goods, services, or other assets is its

A) risk.

B) time to maturity.

C) velocity.

D) liquidity.

4.The opportunity cost of holding currency decreases when

A) income decreases.

B) the interest rate on bonds decreases.

C) the interest rate on money decreases.

D) wealth decreases.

5.Holding other things constant, an increase in expected inflation is likely to cause

A) a decline in the demand for real balances.

B) an increase in the demand for real balances.

C) no change in the demand for real balances.

D) no change in the demand for real balances only if the income elasticity of real money demand

6.An increase in the real interest rate would cause an increase in the real demand for money

A) no matter what the change in expected inflation.

B) if expected inflation fell by less than the rise in the real interest rate.

C) if expected inflation fell by the same amount as the rise in the real interest rate.

D) if expected inflation fell by more than the rise in the real interest rate.

7.If there is a financial panic and increased uncertainty about the returns in the stock market and bond market, what is the likely effect on money demand?

A) Money demand declines first, then rises when inflation increases.

B) Money demand rises.

C) The overall effect is ambiguous.

D) Money demand declines.

8.Let's look at an application of the quantity theory of money. Suppose velocity is constant at 4, real output is constant at 10, and the price level is 2. From this initial situation, the central bank increases the nominal money supply to 6. If velocity and output remain unchanged, by how much will the price level increase?

A) 2.4%

B) 20%

C) 24%

D) 50%

9.Under a situation of asset market equilibrium,

A) the quantity of money supplied equals the quantity of money demanded.

B) the quantity of money supplied equals the quantity of nonmonetary assets demanded.

C) the quantity of nonmonetary assets supplied equals the quantity of monetary assets demanded.

D) the quantity of money supplied equals the quantity of nonmonetary assets supplied.

10.Assume that the asset market is in equilibrium. If real money demand increases 5% and nominal money supply increases 10%, by about how much does the price level change?

A) Falls by 5%

B) Unchanged

C) Rises by 2%

D) Rises by 5%

11.Large differences in inflation rates among countries are almost always the result of large differences in

A) productivity.

B) real income growth.

C) the growth rates of real money demand.

D) the growth rates of nominal money supplies.

12.Bonds sold by the U.S. government that offer a certain real interest rate are known as

A) zero-coupon bonds.

B) Treasury Inflation-Protected Securities.

C) denominalized securities.

D) savings bonds.

13.The excess of the nominal interest rate over the TIPS interest rate is known as the

A) interest-rate differential.

B) break-even inflation rate.

C) yield spread.

D) term structure.

14.How does the break-even inflation rate differ from the expected inflation rate as measured in surveys?

A) They are very close to each other.

B) The break-even inflation rate varies less than the expected inflation rate from surveys.

C) The break-even inflation rate varies more than the expected inflation rate from surveys.

D) The break-even inflation rate is always several percentage points higher than the expected inflation rate from surveys.