Question

Scenario 14-1

The economy is in long-run equilibrium. Suddenly, due to improved international relations and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time.

____ 19.   Refer to the Scenario 14-1. In the short run, which of the following describes the changes that take place in the economy?

a.	Both the price level and real GDP rise.
b.	Both the price level and real GDP fall.
c.	The price level rises and real GDP falls.
d.	The price level falls and real GDP rises.

Scenario 14-2

The economy is in long-run equilibrium. Suddenly, due to corporate scandals, international tensions, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time.

____ 20.   Refer to the Scenario 14-2. In the short-run, which of the following are consistent with the aggregate demand and aggregate supply theory?

a.	The price level and real GDP both increase.
b.	The price level and real GDP both decrease.
c.	The price level rises, and real GDP falls
d.	The price level falls, and real GDP rises.

____ 21.   When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change?

a.	The opportunity cost of holding money increases, so the quantity of money demanded increases.
b.	The opportunity cost of holding money increases, so the quantity of money demanded decreases.
c.	The opportunity cost of holding money decreases, so the quantity of money demanded increases.
d.	The opportunity cost of holding money decreases, so the quantity of money demanded decreases.

____ 22.   According to liquidity-preference theory, if the price level increases, in which direction does the demand curve shift, and how does the interest rate change?

a.	The demand curve shifts right, so the interest rate increases.
b.	The demand curve shifts right, so the interest rate decreases.
c.	The demand curve shifts left, so the interest rate decreases.
d.	The demand curve shifts left, so the interest rate increases.

Answer 1

19.

If people become optimistic about the future, they will spend more on Consumption and investment. It will increase aggregate demand, shifting the AD curve rightward. As a result, in the short run, both equilibrium price level and real GDP will increase.

Answer: option A

20. When citizens become pessimistic about the future, aggregate demand falls, shifting the AD curve leftward. As a result, in the short run, both equilibrium price level and real GDP falls.

Answer: option B