Question

1. What is the effect of lower interest rates on aggregate demand?

Select the correct answer below:

A. they stimulate private investment and raise aggregate demand

B. they reduce consumption and aggregate demand

C. they reduce exports and aggregate demand

D. they increase government spending and the budget deficit.

2. Suppose that bankers estimate that the velocity of money is 2, and that the quantity of goods and services (Q) will rise from 100 to 150 due to a monetary stimulus. Using the quantity equation of money, what will be the impact of a $4,000 dollar increase in the money supply on the price level (P) given an initial money supply of $5,000?

Select the correct answer below:

A. 20

B. 42.7

C. 28

D. 150

3. Assuming a stable velocity and a stable real GDP at the potential levels, according to the quantity equation of money, what results from an increase in the money supply?

Select the correct answer below:

A. mostly inflation

B. unemployment and inflation

C. both inflation and high economic growth

D. deflation

4. In the United States, we call the central bank _____________, often abbreviated as __________.

Select the correct answer below:

A. the Federal Reserve; "the Feds"

B. the Federal Reserve; "the Fed"

C. the US central bank; "the Fed"

D. the New York Federal Reserve bank; "the Fed"

5. Welfare spending is an automatic stabilizer because

Select the correct answer below:

A. It reduces eligibility for individuals in the program during economic downturns

B. It automatically rises during economic downturns as more and more people qualify for benefits, thus, increasing spending in the economy

C. It reduces instability in the financial position of those who qualify for it.

D. It automatically goes down during recession.

6. Which of the following is not correct about a budget surplus?

Select the correct answer below:

A. A budget surplus is a financial situation in which the government receives more money in taxes than it spends in a year.

B. A budget surplus is more likely during an economic boom when tax revenues increase due to increased economic activity.

C. A budget surplus is a financial situation in which government spending and taxes are equal.

D. A budget surplus reduces government's need to borrow.

Answer 1

1. The lower interest rates stimulate private investment and raise aggregate demand. Hence, option(A) is correct.

2. V=2

M= $5000

Q=100

Quantity equation of money : MV= PQ

(5000)(2)= P(100)

So, P= $100

And when Q increases to 150 and M increases by $4000.

Then , (9000)(2)= P(150)

P= $120

This implies that Price increases by [(120-100)/100]100 = 20%. Hence, option(A) is correct.

3. When there is stable velocity and a stable real GDP , that is V and Q are constant. Then , according to the quantity equation of money ,an increase in the money supply results in mostly inflation. Hence, option(A) is correct.

4. In the United States ,we cal the central bank the Federal Reserve ,often abbreviated as "the Fed". Hence, option(C) is correct.