Question 1

A monetary expansion would reduce interest rates, stimulate investment spending and __________.
A) expand the money supply.
B) decrease aggregate demand.
C) expand aggregate demand.
D) expand aggregate supply.

Accepted Answer

A monetary expansion increases the money supply and decreases interest rates. This stimulates investment spending and increases aggregate demand, as individuals and businesses have more access to credit and are more inclined to spend and invest. Therefore, the correct answer is C, as a monetary expansion leads to an expansion of aggregate demand.

Question 2

Although many factors determine the quantity of money demanded, the one emphasized by the theory of liquidity preference is the interest rate.

Accepted Answer

The theory of liquidity preference, proposed by John Maynard Keynes, suggests that the interest rate is a key factor in determining the demand for money. As interest rates rise, individuals and businesses may be less willing to hold onto cash since they could earn higher returns by investing in other assets. This relationship between interest rates and the demand for money is central to the liquidity preference theory.

Question 3

An increase in the interest rate raises the opportunity cost of holding money. There is an incentive, therefore, for people to exchange cash holdings for interest-bearing deposits and this, as a result:
A) increase the money supply.
B) reduces the interest rate.
C) increases the quantity of money demanded.
D) reduces the quantity of money demanded.

Accepted Answer

An increase in the interest rate raises the opportunity cost of holding money, leading people to hold less cash and more interest-bearing assets, thus reducing the quantity of money demanded.

Question 4

When the interest rate falls:
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.

Accepted Answer

When the interest rate falls, the return on interest-yielding assets decreases, making them less attractive to hold. Therefore, people tend to shift their wealth from these assets to holding more money, which is not interest-yielding. This is because the opportunity cost of holding money decreases, as the return on interest-yielding assets falls.

Question 5

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

Accepted Answer

An increase in the interest rate makes borrowing more expensive, which discourages borrowing and leads to a decrease in investment and consumption spending. Thus, an increase in the interest rate reduces the quantity of goods and services demanded.

Question 6

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

Accepted Answer

This is the basic premise of the theory of liquidity preference, as proposed by John Maynard Keynes. When the interest rate is below the equilibrium level, people want to hold more money than there is in circulation, which creates a shortage and drives up the interest rate. This is because people are willing to pay more for the available money, indicating a higher demand for it. Conversely, when the interest rate is above the equilibrium level, people have more money than they wish to hold, which leads to a surplus and decreases the interest rate.

Question 7

At higher interest rates:
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.

Accepted Answer

When interest rates are higher, it means that the cost of borrowing money also becomes higher. This discourages borrowing and encourages saving. The higher return on savings makes it more profitable to save. Similarly, the higher cost of borrowing discourages people from borrowing and taking out loans, resulting in a decrease in demand for loans. Therefore, the cost of borrowing and the return on savings are greater. Option A is incorrect as it indicates that higher interest rates would reduce the price of goods and services, which is not true because higher interest rates often result in a decrease in spending and could lead to inflation causing price increases. Option B is also incorrect as it suggests that the price of borrowing and interest rates both reduce when they are expected to increase.

Question 8

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

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

Question 9

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

Accepted Answer

If a country's central bank increases the money supply, it leads to an increase in aggregate demand, which shifts the aggregate demand curve to the right.

Question 10

The equilibrium interest rate occurs in the money market where the:
A) quantity of money available is zero.
B) maximum quantity of funds has been borrowed and loaned.
C) money supply is equal to the money demanded.
D) quantity of money demanded is zero.

Accepted Answer

At equilibrium, the quantity of money supplied by the central bank is equal to the quantity of money demanded by households, firms and government. This is where the demand for money intersects the supply of money and the interest rate is determined. Therefore, the equilibrium interest rate occurs where the money supply is equal to the money demanded, which is option C.

Question 11

The opportunity cost of holding money is the
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.

Accepted Answer

Opportunity cost refers to the benefits that could have been achieved by choosing an alternative option. When an individual chooses to hold money instead of investing it in other forms of wealth, such as stocks or bonds, they forgo the opportunity to earn interest on those investments. Therefore, the opportunity cost of holding money is the interest that the individual could have earned by holding other forms of wealth instead.

Question 12

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

Accepted Answer

The answer of The equilibrium interest rate is the rate...

Question 13

When the central bank contracts the money supply, the interest rate rises to bring the money market into equilibrium and reduces the quantity of goods and services demanded for any given price level. This:
A) shifts the aggregate demand curve to the right.
B) shifts the aggregate demand curve to the left.
C) shifts the aggregate supply curve to the right.
D) shifts the aggregate supply curve to the left.

Accepted Answer

When the central bank contracts the money supply, the interest rate rises, which makes borrowing more expensive and reduces spending. This leads to a decrease in the quantity of goods and services demanded for any given price level, which in turn causes a leftward shift in the aggregate demand curve.

Question 14

More reflective of current central bank policy is to treat the money supply, rather than the interest rate, as its policy instrument.

Accepted Answer

Central banks typically use interest rates as their primary policy instrument to influence economic activity and control inflation, rather than directly targeting the money supply.

Question 15

When the government cuts spending, aggregate demand will fall, this will depress production and employment in the short run

Accepted Answer

The answer of When the government cuts spending, aggregate demand...

Question 16

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

Accepted Answer

An increase in interest rates increases the cost of borrowing money, which makes residential and business investment less attractive. Therefore, the demand for residential and business investment goods declines.

Question 17

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

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, leading to a surplus of money that puts downward pressure on the interest rate.

Question 18

As the interest rate falls, people become more willing to hold money until, at the equilibrium interest rate, people are happy:
A) to demand the central bank for more money.
B) to hold exactly the amount of money the central bank has supplied.
C) to demand less than the amount of money the central bank has supplied.
D) to demand more than the amount of money the central bank has supplied.

Accepted Answer

At the equilibrium interest rate, people are happy to hold exactly the amount of money the central bank has supplied.

Question 19

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

Accepted Answer

When the money supply is reduced, interest rates are likely to rise, which in turn reduces consumption and investment spending, leading to a decrease in aggregate demand. Therefore, the aggregate demand curve shifts to the left.

Question 20

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

Accepted Answer

According to Keynes's liquidity preference theory, the interest rate is determined by the supply of and demand for money. The theory suggests that individuals and businesses prefer to hold their wealth in liquid assets, such as cash and bank deposits, rather than in illiquid assets, such as stocks and real estate. The demand for money is therefore influenced by the desire to hold liquid wealth. The supply of money is controlled by the central bank through its monetary policy, including setting interest rates. Therefore, the supply of and demand for money determine the interest rate.

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

A monetary expansion would reduce interest rates, stimulate investment spending and __________.

Although many factors determine the quantity of money demanded, the one emphasized by the theory of liquidity preference is the interest rate.

An increase in the interest rate raises the opportunity cost of holding money. There is an incentive, therefore, for people to exchange cash holdings for interest-bearing deposits and this, as a result:

When the interest rate falls:

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

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

At higher interest rates:

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.

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

The equilibrium interest rate occurs in the money market where the:

The opportunity cost of holding money is the

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

When the central bank contracts the money supply, the interest rate rises to bring the money market into equilibrium and reduces the quantity of goods and services demanded for any given price level. This:

More reflective of current central bank policy is to treat the money supply, rather than the interest rate, as its policy instrument.

When the government cuts spending, aggregate demand will fall, this will depress production and employment in the short run

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

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.

As the interest rate falls, people become more willing to hold money until, at the equilibrium interest rate, people are happy:

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

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