Question

9) Following a decrease in government spending, as the price level falls we would expect the level of interest rates to ____ and investment to ____

A) decrease;decrease

B) decrease;increase

C) increase;decreas

D) increase;increase

10) When an economy is in a recession, the Fed needs to do a(n) ___ monetary policy. This policy would____ prices

A) expansionary; lower

B) expansionary; raise

C) contractionary ; lower

D) contractionary; raise

11) we know the following notation:

V= velocity of money

M= money supply

P= price level

Y= real GDP

Which of the following is NOT true according to the quantity theory of money ?

A) M times V is equal to P times Y

B) If V stays the same, any increase in M would result in an inflation

C) If V stays the same, raising M and Y equally wont lead to inflation

D) If V is increasing, raising M and Y equally causes an inflation

Answer 1

9. The correct option is D. If the government spending decreases, the AD will decrease too and the price level will fall. If this happens, the Value of a given amount of money will increase. This the interest rates and the investment will increase.

10. The correct option is B. During the period of recession the fed should use an expansionary monetary policy which will increase the supply of money, the quatof loans will increase, the interest rates will reduce and eventually the aggregate demand curve will shift to right raising the price level.

11. The correct option is D. If the velocity of circulation is increasing, according to the Quantity Theory of money supply, any Increase in money supply will lead to inflation, not both money supply and gdp.

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