Question 1

A decrease in the price level will lead to
A)a decrease in the real interest rate and an increase in net exports.
B)an increase in the real interest rate and an increase in net exports.
C)a decrease in the real interest rate and a decrease in net exports.
D)an increase in the real interest rate and a decrease in net exports.

Accepted Answer

A

Question 2

Which of the following would shift the aggregate demand curve to the left?
A)an increase in the money supply
B)a cut in federal income taxes
C)an expected decrease in future income
D)an increase in the price level

Accepted Answer

An expected decrease in future income would lead consumers to spend less overall, reducing the aggregate demand.

Question 3

Which of the following would NOT shift the aggregate demand curve to the left?
A)an increase in money demand
B)a cut in federal government spending
C)a reduction in federal income taxes
D)a decrease in consumption spending

Accepted Answer

A reduction in federal income taxes would increase disposable income, leading to an increase in consumption spending and a rightward shift in the aggregate demand curve. The other options would decrease overall spending, thereby shifting the aggregate demand curve to the left.

Question 4

An increase in all of the following will increase aggregate demand EXCEPT
A)investment.
B)savings.
C)exports.
D)government spending.

Accepted Answer

Savings represent money that is not being spent and therefore do not contribute to aggregate demand.

Question 5

How does an increase in the short-term interest rate affect peoples' desire to hold real money balances?
A)People will hold more money to compensate for the higher interest rate.
B)People will hold more money in anticipation of higher inflation.
C)People will hold less money since they would be sacrificing more interest by holding money.
D)People will hold less money since it is not worth as much.

Accepted Answer

An increase in short-term interest rates will make it more expensive to hold money since people can earn higher interest by investing it elsewhere. Therefore, people will want to hold less money in order to avoid sacrificing potential interest earnings.

Question 6

How does an increase in the price level lead to a higher interest rate?

Accepted Answer

The answer of How does an increase in the price...

Question 7

An increase in the price level reduces net exports because
A)it leads indirectly to a higher exchange rate.
B)it leads indirectly to a lower exchange rate.
C)it leads indirectly to a lower real interest rate.
D)it leads directly to higher real money balances.

Accepted Answer

An increase in the price level can lead to a higher exchange rate because, as domestic goods become more expensive, foreign goods become relatively cheaper. This can cause the domestic currency to appreciate (increase in value) relative to foreign currencies, making exports more expensive and imports cheaper, thereby reducing net exports.

Question 8

How does an increase in the price level result in higher interest rates?
A)It increases the real money supply.
B)It decreases the real money supply.
C)It increases the real money demand.
D)It decreases the real money demand.

Accepted Answer

An increase in the price level decreases the real value of money, which means that people need more money to purchase the same goods and services. This results in a decrease in the demand for money because individuals and businesses need more money to finance their purchases. This decrease in demand for money leads to an increase in interest rates as lenders charge more to provide loans because of the increased demand for borrowing.

Question 9

The opportunity cost of holding money is measured by:
A)short-term nominal interest rate
B)short-term real interest rate
C)long-term nominal interest rate
D)long-term real interest rate

Accepted Answer

The answer of The opportunity cost of holding money is...

Question 10

Which of the following expressions is correct?
A)AE = C + I + G - NX.
B)AE = C + I + G + NX.
C)AE = C + I + (G - T)+ NX.
D)AE = C + I + (G - T)- NX.

Accepted Answer

In the equation for aggregate expenditure (AE), consumption (C), investment (I), and government spending (G) are all positive components. Net exports (NX) can be either positive (if exports exceed imports) or negative (if imports exceed exports).
Therefore, the correct expression for AE is C + I + G + NX.

Question 11

A rise in the real interest rate will cause which of the components of aggregate demand to decline?
A)Only C
B)Only C and I
C)Only C, I, and NX
D)C, I, G, and NX

Accepted Answer

The answer of A rise in the real interest rate...

Question 12

The aggregate demand curve illustrates the relationship between
A)the aggregate expenditure for goods and services, and the real interest rate.
B)the aggregate expenditure for goods and services, and the level of current output.
C)the level of current output and the real interest rate.
D)the aggregate expenditure for goods and services, and the price level.

Accepted Answer

The aggregate demand curve shows the relationship between the aggregate expenditure for goods and services and the price level. As the price level rises, consumers have less purchasing power, and firms may reduce production, resulting in a decrease in aggregate demand. Conversely, as the price level falls, consumers have more purchasing power, and firms may increase production, resulting in an increase in aggregate demand.

Question 13

If there is a decrease in the expected future profitability of capital,
A)the aggregate demand curve will shift right.
B)the aggregate demand curve will shift left.
C)the aggregate demand curve will become steeper.
D)the aggregate demand curve will be unaffected.

Accepted Answer

A decrease in expected future profitability of capital will cause a decrease in investment, which will shift the aggregate demand curve to the left. This is because businesses will have less incentive to invest in new projects and expansions, leading to a decrease in aggregate spending and demand for goods and services.

Question 14

Which of the following is NOT included in aggregate demand?
A)Demand for goods and services for consumption
B)Investment in business plant and equipment
C)Net exports
D)Investment in Treasury bonds

Accepted Answer

Investment in Treasury bonds is considered a component of financial investment, which is not included in aggregate demand. Aggregate demand only includes demand for goods and services for consumption, investment in business plant and equipment, and net exports.

Question 15

The best explanation of why the aggregate demand curve has a negative slope is that
A)at a higher price level households cut back on their spending on goods and services.
B)at a higher price level business firms wish to produce more goods and services.
C)a higher price level results in lower real balances and a higher real interest rate.
D)a higher price level results in less government spending on transfers, such as unemployment insurance and social security payments.

Accepted Answer

The answer of The best explanation of why the aggregate...

Question 16

If there is a decrease in foreign demand for U.S. goods due to a recession in Europe
A)the U.S. aggregate demand will shift right.
B)the U.S. aggregate demand will shift left.
C)the U.S. aggregate demand will not be affected.
D)the U.S. aggregate demand will become steeper.

Accepted Answer

The decrease in foreign demand for U.S. goods will lead to a decline in U.S. exports, thus leading to a leftward shift in the U.S. aggregate demand.

Question 17

A shift of the AD curve
A)to the right is considered expansionary, and a shift to the left is considered contractionary.
B)to the left is considered expansionary, and a shift to the right is considered contractionary.
C)to the right or to the left is considered contractionary.
D)to the right or to the left is considered expansionary.

Accepted Answer

A shift of the AD curve to the right indicates an increase in aggregate demand and is considered expansionary. This shift can be caused by factors such as increased government spending, tax cuts, or a rise in consumer confidence. Conversely, a shift of the AD curve to the left indicates a decrease in aggregate demand and is considered contractionary. This shift can be caused by factors such as a decrease in consumer confidence, higher taxes, or reduced government spending.

Question 18

Which of the following will NOT shift the aggregate demand curve to the right?
A)a decline in the price level
B)an increase in government expenditures
C)an increase in investment
D)an increase in the money supply

Accepted Answer

A decline in the price level would actually shift the aggregate demand curve to the left, as lower prices would make people less inclined to spend money and would decrease the overall demand for goods and services. An increase in government expenditures, an increase in investment, and an increase in the money supply would all shift the aggregate demand curve to the right, increasing the overall demand for goods and services.

Question 19

Why is the short-term nominal interest rate the opportunity cost of holding money?

Accepted Answer

The answer of Why is the short-term nominal interest rate...

Question 20

Everything else being constant, a lower real interest rate
A)increases desired saving and net exports.
B)decreases desired saving but increases net exports.
C)increases desired saving and investment.
D)increases desired investment but decreases net exports.

Accepted Answer

A lower real interest rate decreases the incentive for saving due to lower returns, but it can make borrowing cheaper for investing in domestic and foreign markets, potentially increasing net exports by making a country's goods more competitive abroad.

Quiz 17: Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

A decrease in the price level will lead to

Which of the following would shift the aggregate demand curve to the left?

Which of the following would NOT shift the aggregate demand curve to the left?

An increase in all of the following will increase aggregate demand EXCEPT

How does an increase in the short-term interest rate affect peoples' desire to hold real money balances?

How does an increase in the price level lead to a higher interest rate?

An increase in the price level reduces net exports because

How does an increase in the price level result in higher interest rates?

The opportunity cost of holding money is measured by:

Which of the following expressions is correct?

A rise in the real interest rate will cause which of the components of aggregate demand to decline?

The aggregate demand curve illustrates the relationship between

If there is a decrease in the expected future profitability of capital,

Which of the following is NOT included in aggregate demand?

The best explanation of why the aggregate demand curve has a negative slope is that

If there is a decrease in foreign demand for U.S. goods due to a recession in Europe

A shift of the AD curve

Which of the following will NOT shift the aggregate demand curve to the right?

Why is the short-term nominal interest rate the opportunity cost of holding money?

Everything else being constant, a lower real interest rate