Question

1. If the Fed engages in contractionary monetary policy, we would expect:
Group of answer choices

AD to be greater at any given price level

AS to be greater at any given price level

AD to be lower at any given price level

AS to be lower at any given price level

2. If households save $0.20 of every dollar of additional income, what is the size of the Keynesian government spending multiplier?
Group of answer choices

0.20

1.00

1.25

5.00

3. Classical economists believe that the demand for money will increase if the _________ increases, while Keynesian economists believe that the demand for money will increase if the _________ falls.

Group of answer choices

unemployment rate, interest rate

price level, unemployment rate

interest rate, price level

price level, interest rate

Answer 1

1.

C

When contractionary monetary policy takes place, then AD decreases and AD curve shifts to the left. It makes AD to decrease at each price level.

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2.

D

Working note:

When MPS = .2

Then,

Spending multiplier = 1/.2

Spending multiplier = 5

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3.

D

It happens because Classical economists think that economy is at full employment, leading demand for money to increase when price increases. Though, Keynesian perspective proposes to increase in demand for money, when interest rate decreases.