Question

Which of the following best describes the "interest rate effect"? An increase in the price level...

Which of the following best describes the "interest rate effect"?

An increase in the price level raises the interest rate and chokes off government spending.

An increase in the price level lowers the interest rate and chokes off investment and consumption spending.

An increase in the price level lowers the interest rate and chokes off government spending.

An increase in the price level raises the interest rate and chokes off investment and consumption spending.

If the marginal propensity to consume is 0.85, then a $10,000 increase in disposable income will

increase consumption by $7,500.

decrease consumption by $8,500.

decrease saving by $1,500.

increase saving by $1,500.

Homework Answers

Answer #2

1) An increase in the price level will lead to a decline in the real money balance . as a result, the money supply curve will shift leftward. Hence, the interest rate will increase.

This will lead to a decline in the investment as both are inversely related and also due to rise in the interest rate people will want to save more and hence consumption will decline.

Hence, option D is correct.

2) C = cYd

=> change in C = c*Change in Yd

=> Change in C = $ [0.85 * 10,000]

Change in C = $ 8500 (increase)

or

an increase in saving by $ 1500 (10,000 - 8500)

Hence correct option is D

answered by: anonymous
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Which of the following best describes the "interest rate effect"? An increase in the price level...
Which of the following best describes the "interest rate effect"? An increase in the price level raises the interest rate and chokes off government spending. An increase in the price level lowers the interest rate and chokes off investment and consumption spending. An increase in the price level lowers the interest rate and chokes off government spending. An increase in the price level raises the interest rate and chokes off investment and consumption spending. If the marginal propensity to consume...
Which of the following best describes the "interest rate effect"? An increase in the price level...
Which of the following best describes the "interest rate effect"? An increase in the price level raises the interest rate and chokes off government spending. An increase in the price level lowers the interest rate and chokes off investment and consumption spending. An increase in the price level lowers the interest rate and chokes off government spending. An increase in the price level raises the interest rate and chokes off investment and consumption spending. If the marginal propensity to consume...
Which of the following best describes the​ "interest rate​ effect"? A. An increase in the price...
Which of the following best describes the​ "interest rate​ effect"? A. An increase in the price level lowers the interest rate and chokes off investment and consumption spending. B. An increase in the price level raises the interest rate and chokes off investment and consumption spending. C. An increase in the price level lowers the interest rate and chokes off government spending. D. An increase in the price level raises the interest rate and chokes off government spending.
1. Which of the following best describes the interest rate effect? Group of answer choices a...
1. Which of the following best describes the interest rate effect? Group of answer choices a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. an increase in the price...
Which of the following best describes the multiplier process? A.  A decrease in exports leads to a...
Which of the following best describes the multiplier process? A.  A decrease in exports leads to a reduction in taxes, which causes government spending to fall. B.  An increase in interest rates leads firms to cut their investment spending. That causes expectations of future profits to worsen, which leads to even more cuts in investment spending. C.  A decline in net exports leads firms to reduce their investment spending, which raises interest rates and causes further reductions in investment spending. D.  A decrease in...
Which of the following best describes the multiplier process? A. A decrease in investment spending leads...
Which of the following best describes the multiplier process? A. A decrease in investment spending leads to a decrease in disposable income, which causes consumers to reduce their spending. B. A decline in net exports leads firms to reduce their investment spending, which raises interest rates and causes further reductions in investment spending. C. A decrease in exports leads to a reduction in taxes, which causes government spending to fall. D. An increase in interest rates leads firms to cut...
The interest rate effect on aggregate demand indicates that a(n): A. Decrease in the price level...
The interest rate effect on aggregate demand indicates that a(n): A. Decrease in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending B. Decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending C. Increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending D. Increase in the supply of money...
Assume that there is a recessionary gap in Shadowland. The government of Shadowland might eliminate the...
Assume that there is a recessionary gap in Shadowland. The government of Shadowland might eliminate the gap by doing all of the following except an increase in government spending. a decrease in personal taxes. an increase in reserve requirement. an decrease in discount rate. an open market purchase. Assume disposable income for an economy is $10,000, consumption is $7,500, and the marginal propensity to save (MPS) is .25. If disposable income increases by $1,000, what is the amount of consumption...
1.Which of the following is a true statement about the multiplier? * The multiplier effect does...
1.Which of the following is a true statement about the multiplier? * The multiplier effect does not occur when autonomous expenditures decrease The multiplier is a value between zero and one The smaller the MPC, the larger the multiplier The multiplier rises as the MPC rises 2.According to the Keynesian model of the macroeconomic, the most effective means for closing a recessionary gap is * Decrease in marginal tax rates which shift SRAS Increases in government spending which shift AD...
In each of the following scenarios, what is the overall effect on equilibrium output? a. Business...
In each of the following scenarios, what is the overall effect on equilibrium output? a. Business optimism rises and, as a result, planned investment spending rises by $5 million. The marginal propensity to consume is 0.80. We can expect equilibrium output to  (Click to select)  increase  decrease  by $ million? b. Household wealth rises and, as a result, autonomous consumption spending rises by $4 million. The marginal propensity to consume is 0.60. We can expect equilibrium output to  (Click to select)  increase  decrease  by $ million? c. Taxes...