Question 1

According to the theory of liquidity preference,if the interest rate rises

Accepted Answer

A) people want to hold more money.This response is shown by moving to the right along the money demand curve. 
B) people want to hold more money.This response is shown by shifting the money demand curve right. 
C) people want to hold less money.This response is shown by moving to the left along the money demand curve. 
D) people want to hold less money.This response is shown by shifting the money demand curve left. 
A) people want to hold more money.This response is shown by moving to the right along the money demand curve. 
B) people want to hold more money.This response is shown by shifting the money demand curve right. 
C) people want to hold less money.This response is shown by moving to the left along the money demand curve. 
D) people want to hold less money.This response is shown by shifting the money demand curve left.

Question 2

People are likely to want to hold more money if the interest rate

Accepted Answer

A) increases,making the opportunity cost of holding money rise. 
B) increases,making the opportunity cost of holding money fall. 
C) decreases,making the opportunity cost of holding money rise. 
D) decreases,making the opportunity cost of holding money fall. 
A) increases,making the opportunity cost of holding money rise. 
B) increases,making the opportunity cost of holding money fall. 
C) decreases,making the opportunity cost of holding money rise. 
D) decreases,making the opportunity cost of holding money fall.

Question 3

Which of the following Fed actions would both decrease the money supply?

Accepted Answer

A) buy bonds and raise the reserve requirement 
B) buy bonds and lower the reserve requirement 
C) sell bonds and raise the reserve requirement 
D) sell bonds and lower the reserve requirement 
A) buy bonds and raise the reserve requirement 
B) buy bonds and lower the reserve requirement 
C) sell bonds and raise the reserve requirement 
D) sell bonds and lower the reserve requirement

Question 4

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?

Accepted Answer

A) the wealth effect 
B) the interest-rate effect 
C) the exchange-rate effect 
D) All of the above are correct. 
A) the wealth effect 
B) the interest-rate effect 
C) the exchange-rate effect 
D) All of the above are correct.

Question 5

In the short run,open-market purchases

Accepted Answer

A) increase investment and real GDP,and decrease nominal interest rates. 
B) increase real GDP and nominal interest rates,and decrease investment. 
C) increase investment and nominal interest rates,and decrease real GDP. 
D) decrease investment,nominal interest rates,and real GDP. 
A) increase investment and real GDP,and decrease nominal interest rates. 
B) increase real GDP and nominal interest rates,and decrease investment. 
C) increase investment and nominal interest rates,and decrease real GDP. 
D) decrease investment,nominal interest rates,and real GDP.

Question 6

Figure 34-4.On the figure,MS represents money supply and MD represents money demand.  
-Refer to Figure 34-4.Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Accepted Answer

A) a decrease in the price level 
B) a decrease in the cost of borrowing 
C) an increase in the price level 
D) an increase in the cost of borrowing 
A) a decrease in the price level 
B) a decrease in the cost of borrowing 
C) an increase in the price level 
D) an increase in the cost of borrowing

Question 7

Figure 34-1  
-Refer to Figure 34-1.There is an excess demand for money at an interest rate of

Accepted Answer

A) 2 percent. 
B) 3 percent. 
C) 4 percent. 
D) None of the above is correct. 
A) 2 percent. 
B) 3 percent. 
C) 4 percent. 
D) None of the above is correct.

Question 8

To decrease the interest rate the Federal Reserve could

Accepted Answer

A) buy bonds.The fall in the interest rate would increase investment spending. 
B) buy bonds.The fall in the interest rate would decrease investment spending. 
C) sell bonds.The fall in the interest rate would increase investment spending 
D) sell bonds.The fall in the interest rate would decrease investment spending. 
A) buy bonds.The fall in the interest rate would increase investment spending. 
B) buy bonds.The fall in the interest rate would decrease investment spending. 
C) sell bonds.The fall in the interest rate would increase investment spending 
D) sell bonds.The fall in the interest rate would decrease investment spending.

Question 9

An increase in the interest rate could have been caused by

Accepted Answer

A) a fall in the price level causing the money-demand curve to shift leftward. 
B) a fall in the price level causing the money-demand curve to shift rightward. 
C) a rise in the price level causing the money-demand curve to shift leftward. 
D) a rise in the price level causing the money-demand curve to shift rightward. 
A) a fall in the price level causing the money-demand curve to shift leftward. 
B) a fall in the price level causing the money-demand curve to shift rightward. 
C) a rise in the price level causing the money-demand curve to shift leftward. 
D) a rise in the price level causing the money-demand curve to shift rightward.

Question 10

The most important reason for the slope of the aggregate-demand curve is that as the price level

Accepted Answer

A) increases,interest rates increase,and investment decreases. 
B) increases,interest rates decrease,and investment increases. 
C) decreases,interest rates increase,and investment increases. 
D) decreases,interest rates decrease,and investment decreases. 
A) increases,interest rates increase,and investment decreases. 
B) increases,interest rates decrease,and investment increases. 
C) decreases,interest rates increase,and investment increases. 
D) decreases,interest rates decrease,and investment decreases.

Question 11

The theory of liquidity preference illustrates the principle that

Accepted Answer

A) monetary policy can be described either in terms of the money supply or in terms of the interest rate. 
B) monetary policy can be described either in terms of the exchange rate or the interest rate. 
C) monetary policy must be described in terms of the money supply. 
D) monetary policy must be described in terms of the interest rate. 
A) monetary policy can be described either in terms of the money supply or in terms of the interest rate. 
B) monetary policy can be described either in terms of the exchange rate or the interest rate. 
C) monetary policy must be described in terms of the money supply. 
D) monetary policy must be described in terms of the interest rate.

Question 12

Monetary policy

Accepted Answer

A) must be described in terms of interest-rate targets. 
B) must be described in terms of money-supply targets. 
C) can be described either in terms of the money supply or in terms of the interest rate. 
D) cannot be accurately described in terms of the interest rate or in terms of the money supply. 
A) must be described in terms of interest-rate targets. 
B) must be described in terms of money-supply targets. 
C) can be described either in terms of the money supply or in terms of the interest rate. 
D) cannot be accurately described in terms of the interest rate or in terms of the money supply.

Question 13

Changes in the interest rate bring the money market into equilibrium according to

Accepted Answer

A) both liquidity preference theory and classical theory. 
B) neither liquidity preference theory nor classical theory. 
C) liquidity preference theory,but not classical theory. 
D) classical theory,but not liquidity preference theory. 
A) both liquidity preference theory and classical theory. 
B) neither liquidity preference theory nor classical theory. 
C) liquidity preference theory,but not classical theory. 
D) classical theory,but not liquidity preference theory.

Question 14

Which of the following statements is correct?

Accepted Answer

A) Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. 
B) Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. 
C) Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium;classical theory assumes the price level adjusts to bring the money market into equilibrium. 
D) Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium;classical theory assumes the interest rate adjusts to bring the money market into equilibrium. 
A) Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. 
B) Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. 
C) Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium;classical theory assumes the price level adjusts to bring the money market into equilibrium. 
D) Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium;classical theory assumes the interest rate adjusts to bring the money market into equilibrium.

Question 15

As the interest rate falls,

Accepted Answer

A) the quantity of money demanded falls,which would reduce a shortage. 
B) the quantity of money demanded falls,which would reduce a surplus. 
C) the quantity of money demanded rises,which would reduce a shortage. 
D) the quantity of money demanded rises,which would reduce a surplus. 
A) the quantity of money demanded falls,which would reduce a shortage. 
B) the quantity of money demanded falls,which would reduce a surplus. 
C) the quantity of money demanded rises,which would reduce a shortage. 
D) the quantity of money demanded rises,which would reduce a surplus.

Question 16

Figure 34-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.
.  
-Refer to Figure 34-2.Assume the money market is always in equilibrium,and suppose r1 = 0.08;r2 = 0.12;Y1 = 13,000;Y2 = 10,000;P1 = 1.0;and P2 = 1.2.Which of the following statements is correct? When P = P2,

Accepted Answer

A) investment is lower than it is when P = P1. 
B) nominal output is higher than it is when P = P1. 
C) the expected rate of inflation is higher than it is when P = P1. 
D) the velocity of money is higher than it is when P = P1. 
A) investment is lower than it is when P = P1. 
B) nominal output is higher than it is when P = P1. 
C) the expected rate of inflation is higher than it is when P = P1. 
D) the velocity of money is higher than it is when P = P1.

Question 17

When the interest rate increases,the opportunity cost of holding money

Accepted Answer

A) increases,so the quantity of money demanded increases. 
B) increases,so the quantity of money demanded decreases. 
C) decreases,so the quantity of money demanded increases. 
D) decreases,so the quantity of money demanded decreases. 
A) increases,so the quantity of money demanded increases. 
B) increases,so the quantity of money demanded decreases. 
C) decreases,so the quantity of money demanded increases. 
D) decreases,so the quantity of money demanded decreases.

Question 18

According to liquidity preference theory,if the price level decreases,then

Accepted Answer

A) the interest rate falls because money demand shifts right. 
B) the interest rate falls because money demand shifts left. 
C) the interest rate rises because money supply shifts right. 
D) the interest rate rises because money supply shifts left. 
A) the interest rate falls because money demand shifts right. 
B) the interest rate falls because money demand shifts left. 
C) the interest rate rises because money supply shifts right. 
D) the interest rate rises because money supply shifts left.

Question 19

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well.Most economists would say that Marcus's opinion is

Accepted Answer

A) Keynesian in nature,and that his view is more valid for the long run than for the short run. 
B) classical in nature,and that his view is more valid for the long run than for the short run. 
C) Keynesian in nature,and that his view is more valid for the short run than for the long run. 
D) classical in nature,and that his view is more valid for the short run than for the long run. 
A) Keynesian in nature,and that his view is more valid for the long run than for the short run. 
B) classical in nature,and that his view is more valid for the long run than for the short run. 
C) Keynesian in nature,and that his view is more valid for the short run than for the long run. 
D) classical in nature,and that his view is more valid for the short run than for the long run.

Question 20

The interest rate would fall and the quantity of money demanded would

Accepted Answer

A) increase if there were a surplus in the money market. 
B) increase if there were a shortage in the money market. 
C) decrease if there were a surplus in the money market. 
D) decrease if there were a shortage in the money market. 
A) increase if there were a surplus in the money market. 
B) increase if there were a shortage in the money market. 
C) decrease if there were a surplus in the money market. 
D) decrease if there were a shortage in the money market.

Exam 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: How Monetary Policy Influences Aggregate Demand

According to the theory of liquidity preference,if the interest rate rises

People are likely to want to hold more money if the interest rate

Which of the following Fed actions would both decrease the money supply?

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?

In the short run,open-market purchases

Figure 34-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 34-4.Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

Figure 34-1 -Refer to Figure 34-1.There is an excess demand for money at an interest rate of

To decrease the interest rate the Federal Reserve could

An increase in the interest rate could have been caused by

The most important reason for the slope of the aggregate-demand curve is that as the price level

The theory of liquidity preference illustrates the principle that

Monetary policy

Changes in the interest rate bring the money market into equilibrium according to

Which of the following statements is correct?

As the interest rate falls,

When the interest rate increases,the opportunity cost of holding money

According to liquidity preference theory,if the price level decreases,then

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well.Most economists would say that Marcus's opinion is

The interest rate would fall and the quantity of money demanded would

Ten Principles of Economics

Ten Principles of Economics: How People Make Decisions

Ten Principles of Economics: How People Interact

Ten Principles of Economics: How the Economy As a Whole Works

Ten Principles of Economics: Part A

Ten Principles of Economics: Part B

Thinking Like an Economist

Thinking Like an Economist: The Economist As Scientist

Thinking Like an Economist: The Economist As Policy Adviser

Thinking Like an Economist: Why Economists Disagree

Thinking Like an Economist: Lets Get Going

Thinking Like an Economist: Graphing a Brief Review

Thinking Like an Economist: Part A

Thinking Like an Economist: Part B

Interdependence and the Gains From Trade

Interdependence and the Gains From Trade: A Parable for the Modern Economy

Interdependence and the Gains From Trade: Comparative Advantage the Driving Force of Specialization

Interdependence and the Gains From Trade: Applications of Comparative Advantage

Interdependence and the Gains From Trade: Conclusion

Interdependence and the Gains From Trade: Part A

Interdependence and the Gains From Trade: Part B

The Market Forces of Supply and Demand

The Market Forces of Supply and Demand:Markets and Competition

The Market Forces of Supply and Demand: Demand

The Market Forces of Supply and Demand: Supply

The Market Forces of Supply and Demand: Supply and Demand Together

The Market Forces of Supply and DemandConclusion How Prices Allocate Resources

The Market Forces of Supply and Demand: Part A

The Market Forces of Supply and Demand: Part B

Elasticity and Its Applications

Elasticity and Its Applications: The Elasticity of Demand

Elasticity and Its Applications: The Elasticity of Supply

Elasticity and Its Applications: Three Applications of Supply,demand,and Elasticity

Elasticity and Its Applications: Part A

Elasticity and Its Applications: Part B

Supply Demand and Government Policies

Supply Demand and Government Policies: Controls on Prices

Supply Demand and Government Policies: Taxes

Supply Demand and Government Policies: Part A

Supply Demand and Government Policies: Part B

Consumers Producers and the Efficiency of Markets

Consumers Producers and the Efficiency of Markets: Consumer Surplus

Consumers Producers and the Efficiency of Markets: Producer Surplus

Consumers Producers and the Efficiency of Markets: Market Efficiency

Consumers Producers and the Efficiency of Markets: Conclusion Market Efficiency and Market Failure

Consumers Producers and the Efficiency of Markets: Part A

Consumers Producers and the Efficiency of Markets: Part B

Application the Cost of Taxation

Application the Cost of Taxation: The Deadweight Loss of Taxation

Application the Cost of Taxation: The Determinants of the Deadweight Loss

Application the Cost of Taxation: Deadweight Loss and Tax Revenue As Taxes Vary

Application the Cost of Taxation: Conclusion

Application the Cost of Taxation: Part A

Application the Cost of Taxation: Part B

Application International Trade

Application International Trade: The Determinants of Trade

Application International Trade: The Winners and Losers From Trade

Application International Trade: The Arguments for Restricting Trade

Application International Trade: Conclusion

Application International Trade: Part A

Figure 34-4.On the figure,MS represents money supply and MD represents money demand. -Refer to Figure 34-4.Which of the following events could explain a shift of the money-demand curve from MD₁ to MD₂?