Question 1

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households
A)increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.
B)decreases and as a result consumption spending increases. This effect contributes to the upward slope of the aggregate-supply curve.
C)increases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases. This effect contributes to the downward slope of the aggregate-demand curve.
D)decreases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases. This effect contributes to the upward slope of the aggregate-supply curve.

Accepted Answer

The wealth effect refers to the idea that when the price level decreases, the real wealth of households increases. This increase in wealth leads to an increase in consumption spending, which contributes to the downward slope of the aggregate-demand curve.

Question 2

People will buy more if the price level
A)rises because rising prices increase the real value of a dollar.
B)rises because rising prices decrease the real value of a dollar.
C)falls because falling prices increase the real value of a dollar.
D)falls because falling prices decrease the real value of a dollar.

Accepted Answer

When prices fall, the purchasing power of a dollar increases, meaning consumers are able to buy more goods and services with the same amount of money. This leads to an increase in demand and higher sales.

Question 3

Other things the same, when the price level rises, interest rates
A)rise, so firms increase investment.
B)rise, so firms decrease investment.
C)fall, so firms increase investment.
D)fall, so firms decrease investment.

Accepted Answer

When the price level rises, the demand for money increases, which causes interest rates to rise. Higher interest rates make borrowing more expensive for firms, leading to a decrease in investment. Therefore, choice B is the correct answer.

Question 4

Other things the same, a decrease in the price level motivates people to hold
A)less money, so they lend less, and the interest rate rises.
B)less money, so they lend more, and the interest rate falls.
C)more money, so they lend more, and the interest rate rises.
D)more money, so they lend less, and the interest rate falls.

Accepted Answer

The answer of Other things the same, a decrease in...

Question 5

Other things the same, a decrease in the price level makes the dollars people hold worth
A)more, so they can buy more.
B)more, so they can buy less.
C)less, so they can buy more.
D)less, so they can buy less.

Accepted Answer

When the price level decreases, the purchasing power of a dollar increases, meaning that people are able to buy more goods and services with the same amount of money. This makes the dollars people hold worth more.

Question 6

Other things the same, an increase in the price level induces people to hold
A)less money, so they lend less, and the interest rate rises.
B)less money, so they lend more, and the interest rate falls.
C)more money, so they lend more, and the interest rate falls.
D)more money, so they lend less, and the interest rate rises.

Accepted Answer

An increase in the price level reduces the purchasing power of money. As a result, people would want to hold less money and lend more. With an increase in lending and a drop in money demand, the interest rate falls. Therefore, D is the correct answer.

Question 7

Other things the same, a decrease in the price level makes consumers feel
A)less wealthy, so the quantity of goods and services demanded falls.
B)less wealthy, so the quantity of goods and services demanded rises.
C)more wealthy, so the quantity of goods and services demanded rises.
D)more wealthy, so the quantity of goods and services demanded falls.

Accepted Answer

The answer of Other things the same, a decrease in...

Question 8

When the price level falls
A)people want to hold more money.
B)the interest rate rises.
C)investment spending rises.
D)All of the above are correct.

Accepted Answer

The answer of When the price level falls
A)people want to...

Question 9

As the price level rises
A)people are more willing to lend, so interest rates rise.
B)people are more willing to lend, so interest rates fall.
C)people are less willing to lend, so interest rates fall.
D)people are less willing to lend, so interest rates rise.

Accepted Answer

As the price level rises, people become less willing to lend money because they may be concerned that they will not be repaid with money that is worth as much as the money they lent. This decrease in the supply of loanable funds puts upward pressure on interest rates. Therefore, choice D is correct.

Question 10

When the price level falls
A)people want to hold less money.
B)the interest rate falls.
C)investment spending rises.
D)All of the above are correct.

Accepted Answer

The answer of When the price level falls
A)people want to...

Question 11

Other things the same, an increase in the price level makes consumers feel
A)less wealthy, so the quantity of goods and services demanded falls.
B)less wealthy, so the quantity of goods and services demanded rises.
C)more wealthy, so the quantity of goods and services demanded rises.
D)more wealthy, so the quantity of goods and services demanded falls.

Accepted Answer

An increase in the price level reduces the purchasing power of consumers, making them feel less wealthy. Therefore, the quantity of goods and services demanded falls, according to the law of demand.

Question 12

As the price level rises
A)people will want to hold more money, so the interest rate rises.
B)people will want to hold more money, so the interest rate falls.
C)people will want to hold less money, so the interest rate falls.
D)people will want to hold less money, so the interest rate rises.

Accepted Answer

The answer of As the price level rises
A)people will want...

Question 13

When the price level falls
A)the interest rate rises, so the quantity of goods and services demand rises.
B)the interest rate rises, so the quantity of goods and services demand falls.
C)the interest rate falls, so the quantity of goods and services demand rises.
D)the interest rate falls, so the quantity of goods and services demand falls.

Accepted Answer

When the price level falls, the purchasing power of consumers increases, leading to greater demand for goods and services. This increase in demand leads to an increase in economic activity and a decrease in interest rates. Lower interest rates encourage borrowing and investment, which further stimulate economic growth. Therefore, the correct choice is C - the interest rate falls, so the quantity of goods and services demand rises.

Question 14

As the price level rises
A)people will want to buy more bonds, so the interest rate rises.
B)people will want to buy fewer bonds, so the interest rate falls.
C)people will want to buy more bonds, so the interest rate falls.
D)people will want to buy fewer bonds, so the interest rate rises.

Accepted Answer

As the price level rises, people will want to buy fewer bonds because the inflation erodes the value of the fixed payments made by the bonds. Thus, to compensate for the loss of value, investors will demand a higher interest rate. Therefore, the interest rate rises. Hence, the correct option is D.

Question 15

As the price level falls
A)people will want to hold more money, so the interest rate rises.
B)people will want to hold more money, so the interest rate falls.
C)people will want to hold less money, so the interest rate falls.
D)people will want to hold less money, so the interest rate rises.

Accepted Answer

The answer of As the price level falls
A)people will want...

Question 16

When the price level falls
A)The interest rate falls because people will want to hold more money and so sell bonds.
B)Firms will want to spend more on new business buildings and business equipment and households will want to spend more building new homes.
C)Both A and B are correct.
D)None of the above are correct.

Accepted Answer

The answer of When the price level falls
A)The interest rate...

Question 17

The aggregate quantity of goods and services demanded changes as the price level falls because
A)real wealth falls, interest rates rise, and the dollar appreciates.
B)real wealth falls, interest rates rise, and the dollar depreciates.
C)real wealth rises, interest rates fall, and the dollar appreciates.
D)real wealth rises, interest rates fall, and the dollar depreciates.

Accepted Answer

The answer of The aggregate quantity of goods and services...

Question 18

As the price level falls
A)people will want to buy more bonds, so the interest rate rises.
B)people will want to buy fewer bonds, so the interest rate falls.
C)people will want to buy more bonds, so the interest rate falls.
D)people will want to buy fewer bonds, so the interest rate rises.

Accepted Answer

The answer of As the price level falls
A)people will want...

Question 19

Other things the same, an increase in the price level makes the dollars people hold worth
A)more, so they can buy more.
B)more, so they can buy less.
C)less, so they can buy more.
D)less, so they can buy less.

Accepted Answer

An increase in the price level results in inflation, therefore the purchasing power of the dollars people hold decreases. This means that they can buy less with the same amount of money.

Question 20

As the price level falls
A)people are more willing to lend, so interest rates rise.
B)people are more willing to lend, so interest rates fall.
C)people are less willing to lend, so interest rates fall.
D)people are less willing to lend, so interest rates rise.

Accepted Answer

When the price level falls, people become more willing to lend because they have more purchasing power in the future. This increased willingness to lend leads to a greater supply of loanable funds, which in turn drives down interest rates. Therefore, interest rates fall as the price level falls.

Quiz 33: Aggregate Demand and Aggregate Supply

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households

People will buy more if the price level

Other things the same, when the price level rises, interest rates

Other things the same, a decrease in the price level motivates people to hold

Other things the same, a decrease in the price level makes the dollars people hold worth

Other things the same, an increase in the price level induces people to hold

Other things the same, a decrease in the price level makes consumers feel

When the price level falls

As the price level rises

When the price level falls

Other things the same, an increase in the price level makes consumers feel

As the price level rises

When the price level falls

As the price level rises

As the price level falls

When the price level falls

The aggregate quantity of goods and services demanded changes as the price level falls because

As the price level falls

Other things the same, an increase in the price level makes the dollars people hold worth

As the price level falls