Question 1

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

Accepted Answer

An increase in interest rates makes borrowing more expensive, which decreases the quantity of goods and services demanded since people are less likely to take out loans or use credit.

Question 2

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

Accepted Answer

When the central bank contracts the money supply, it reduces the availability of money in the economy, leading to a decrease in demand for goods and services. This shifts the aggregate demand curve to the left.

Question 3

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 leads to a decrease in investment and consumption spending. This, in turn, reduces the quantity of goods and services demanded for any given price level, shifting the aggregate demand curve to the left.

Question 4

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

The answer of According to the theory of liquidity preference,...

Question 5

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 statement is true.

Question 6

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

Accepted Answer

Increasing the money supply typically leads to an increase in spending and consumption, which would shift the aggregate demand curve to the right, not the left.

Question 7

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 issues 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

As the interest rate falls, the opportunity cost of holding money decreases, making people more willing to hold money. At the equilibrium interest rate, the demand for money matches the supply of money, which means people are willing to hold exactly the amount of money that the central bank has supplied. Therefore, choice B is the best answer. Option A is incorrect because at the equilibrium interest rate, people do not want the central bank to issue more money. Option C is incorrect because demand for money equals the supply of money at the equilibrium interest rate, meaning people only demand the same amount of money that the central bank has supplied. Option D is incorrect because people only demand the same amount of money that the central bank has supplied at the equilibrium interest rate.

Question 8

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 developed by John Maynard Keynes emphasizes the role of interest rates in determining the demand for money. It posits that individuals and institutions hold money because it provides liquidity and the ability to meet unexpected expenses. However, holding money also foregoes the opportunity to earn interest on alternative investments, so the demand for money is influenced by the interest rate. When interest rates are low, the opportunity cost of holding money is low, and the demand for money is high. Conversely, when interest rates are high, the opportunity cost of holding money is high, and the demand for money is low.

Question 9

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

The answer of An increase in the interest rate raises...

Question 10

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 interest rates fall, the return on interest-yielding assets decreases. This makes holding money relatively more attractive, as the opportunity cost of holding money (i.e. the foregone interest earned on interest-yielding assets) is lower. As a result, people shift out of holding interest-yielding assets and hold more of their wealth in the form of money, leading to an increase in the demand for money.

Question 11

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 involves increasing the money supply, which in turn would lead to lower interest rates. Lower interest rates would make it cheaper for businesses to borrow money, which would in turn lead to an increase in investment spending. This increase in investment spending would stimulate aggregate demand, as firms produce more goods and services to meet the increased demand. Therefore, the correct answer is (C) expand aggregate demand.

Question 12

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

The opportunity cost of holding money refers to the interest that could have been earned if the money had been held in other forms of wealth instead. Holding money means missing out on potential earnings from investments, savings accounts, or other financial assets that generate interest. Therefore, choice D is the best answer.

Question 13

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

Accepted Answer

The equilibrium interest rate occurs in the money market where the money supply is equal to the money demanded. At this point, there is no excess supply or demand for money, and the market clears.

Question 14

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 the interest rate makes borrowing more expensive, which decreases the desire of consumers to purchase big-ticket items like homes and businesses. Therefore, the demand for residential and business investment goods will decline.

Question 15

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 16

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

Accepted Answer

The answer of More reflective of current central bank policy...

Question 17

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 18

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 19

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 the liquidity preference theory of John Maynard Keynes, interest rates are determined by the supply of and demand for money. The theory suggests that people have a preference for holding money in the form of liquid cash or deposits in banks, and they will only invest in securities or assets if the return is high enough to compensate for the loss of liquidity. As a result, the interest rate will adjust to balance the demand for money with the supply of savings available for investment.

Question 20

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...

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

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

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

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

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.

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.

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

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

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

The opportunity cost of holding money is the

The equilibrium interest rate occurs in the money market where the

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 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.

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

At higher interest rates

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

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

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