Question 1

An increase in the interest rate reduces the quantity of goods and services demanded.As a result

Accepted Answer

A)  the demand for domestic goods increases.
B)  the demand for foreign goods declines.
C)  the demand for residential and business investment goods increases.
D)  the demand for residential and business investment goods declines.E) B) and C)
F) None of the above

Question 2

Suppose that consumers become pessimistic about the future health of the economy.What will happen to aggregate demand and to output? What might a government have to do to keep output stable?

Accepted Answer

As consumers become pessimistic about th...

Question 3

When the government cuts personal income taxes, for instance, it increases households' take home pay.As a result

Accepted Answer

A)  households will save all of this additional income, and spend little or nothing on consumer goods.
B)  households will save some of this additional income, but will also spend some of it on consumer goods.
C)  households will not save any of this additional income, but will spend all of it on the stock market.
D)  households will neither save the additional income nor spend it on consumer goods.E) A) and C)
F) A) and D)

Question 4

An increase in the interest rate reduces the quantity of goods and services demanded, because borrowing is less expensive.

Accepted Answer

A) True 
 B)False

Question 5

The equilibrium interest rate is the rate at which the quantity of money demanded exactly balances the quantity of money supplied.

Accepted Answer

A) True 
 B)False

Question 6

The opportunity cost of holding money is the

Accepted Answer

A)  cost incurred to change other assets into money.
B)  time cost of accessing funds.
C)  value of the goods and services a person is able to obtain with the money.
D)  interest a person could have earned by holding other forms of wealth instead.E) None of the above
F) All of the above

Question 7

What is the difference between monetary policy and fiscal policy?

Accepted Answer

The South African Reserve Bank, the Bank...

Question 8

Use the money market to explain the interest rate effect and its relation to the slope of the aggregate demand curve.

Accepted Answer

When the price level falls, people need ...

Question 9

At higher interest rates

Accepted Answer

A)  the price of goods and services are reduced.
B)  the price of borrowing and the interest rates are reduced.
C)  the cost of borrowing and the return on savings are greater.
D)  the cost of borrowing and the return on savings are reduced.E) None of the above
F) A) and D)

Question 10

Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

Accepted Answer

The nominal interest rate on currency is...

Question 11

Briefly discuss the theory of liquidity preference.

Accepted Answer

In his classic book, The General Theory ...

Question 12

When the interest rate falls

Accepted Answer

A)  the opportunity cost of holding money rises.
B)  people shift out of holding interest yielding assets and hold more of their wealth in the form of money.
C)  the quantity of money people will hold decreases.
D)  investment spending decreases.E) B) and D)
F) B) and C)

Question 13

According to the theory of liquidity preference, if the interest rate is above the equilibrium level, the quantity of money people want to hold is less than the quantity the central bank has created, and this surplus of money puts upward pressure on the interest rate.

Accepted Answer

A) True 
 B)False

Question 14

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Accepted Answer

When the money supply increases, the int...

Question 15

The equilibrium interest rate occurs in the money market where the

Accepted Answer

A)  quantity of money available is zero.
B)  the maximum quantity of funds has been borrowed and loaned.
C)  the money supply is equal to the money demanded.
D)  the quantity of money demanded is zero.E) C) and D)
F) B) and C)

Question 16

Different theories of the interest rate are useful for different purposes.When thinking about the long run determinants of interest rates, it is best to keep in mind

Accepted Answer

A)  the loanable funds theory.
B)  the liquidity preference theory.
C)  the classical economic theory.
D)  the price level theory.E) B) and D)
F) None of the above

Question 17

The crowding out effect is caused by

Accepted Answer

A)  an increase in the money supply, which increases the demand for goods and services, and thus crowds out investment.
B)  an increase in government purchases, which reduces the demand for goods and services, and thus crowds out investment.
C)  an increase in consumer income, which increases the demand for goods and services, and thus crowds out investment.
D)  an increase in government purchases, which increases the demand for goods and services, and thus crowds out investment.E) C) and D)
F) A) and C)

Question 18

John Maynard Keynes's liquidity preference theory suggests that the interest rate is determined by

Accepted Answer

A)  the supply of and demand for loanable funds.
B)  aggregate supply and aggregate demand.
C)  the commercial banks.
D)  the supply of and demand for money.E) B) and C)
F) None of the above

Question 19

Originally developed by John Maynard Keynes in the 1930s, the theory of liquidity preference holds that the interest rate adjusts to bring money supply and money demand into balance.

Accepted Answer

A) True 
 B)False

Question 20

If a country's central bank increases the money supply, the aggregate demand curve shifts to the left.

Accepted Answer

A) True 
 B)False

Exam 16: The Influence of Monetary and Fiscal Policy on Aggregate Demand

The opportunity cost of holding money is the

Correct AnswerverifiedShow Answer

At higher interest rates

Correct AnswerverifiedShow Answer

If a country's central bank increases the money supply, the aggregate demand curve shifts to the left.

Correct AnswerverifiedShow Answer

Originally developed by John Maynard Keynes in the 1930s, the theory of liquidity preference holds that the interest rate adjusts to bring money supply and money demand into balance.

Correct AnswerverifiedShow Answer

According to the theory of liquidity preference, if the interest rate is above the equilibrium level, the quantity of money people want to hold is less than the quantity the central bank has created, and this surplus of money puts upward pressure on the interest rate.

Correct AnswerverifiedShow Answer

Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

Correct AnswerverifiedThe nominal interest rate on currency is...View AnswerShow Answer

John Maynard Keynes's liquidity preference theory suggests that the interest rate is determined by

Correct AnswerverifiedShow Answer

When the government cuts personal income taxes, for instance, it increases households' take home pay.As a result

Correct AnswerverifiedShow Answer

Briefly discuss the theory of liquidity preference.

Correct AnswerverifiedIn his classic book, The General Theory ...View AnswerShow Answer

What is the difference between monetary policy and fiscal policy?

Correct AnswerverifiedThe South African Reserve Bank, the Bank...View AnswerShow Answer

An increase in the interest rate reduces the quantity of goods and services demanded.As a result

Correct AnswerverifiedShow Answer

The equilibrium interest rate occurs in the money market where the

Correct AnswerverifiedShow Answer

Different theories of the interest rate are useful for different purposes.When thinking about the long run determinants of interest rates, it is best to keep in mind

Correct AnswerverifiedShow Answer

An increase in the interest rate reduces the quantity of goods and services demanded, because borrowing is less expensive.

Correct AnswerverifiedShow Answer

The crowding out effect is caused by

Correct AnswerverifiedShow Answer

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Correct AnswerverifiedWhen the money supply increases, the int...View AnswerShow Answer

The equilibrium interest rate is the rate at which the quantity of money demanded exactly balances the quantity of money supplied.

Correct AnswerverifiedShow Answer

Suppose that consumers become pessimistic about the future health of the economy.What will happen to aggregate demand and to output? What might a government have to do to keep output stable?

Correct AnswerverifiedAs consumers become pessimistic about th...View AnswerShow Answer

Use the money market to explain the interest rate effect and its relation to the slope of the aggregate demand curve.

Correct AnswerverifiedWhen the price level falls, people need ...View AnswerShow Answer

When the interest rate falls

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The nominal interest rate on currency is...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
In his classic book, The General Theory ...
View Answer

Correct Answer
verified
The South African Reserve Bank, the Bank...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
When the money supply increases, the int...
View Answer

Correct Answer
verified

Correct Answer
verified
As consumers become pessimistic about th...
View Answer

Correct Answer
verified
When the price level falls, people need ...
View Answer

Correct Answer
verified