Question

22. Over what period of time is the liquidity-preference theory most relevant, and what does it suppose?

a.	short run; it supposes that the price level adjusts to bring money supply and money demand into balance
b.	short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance
c.	long run; it supposes that the price level adjusts to bring money supply and money demand into balance
d.	long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance

Figure 15-1

____   23.   Refer to the Figure 15-1. At which of the following interest rates is there an excess money demand?

a.	2 percent
b.	3 percent
c.	4 percent
d.	5 percent

____   24.   Assume the money market is initially in equilibrium. If the price level decreases, according to liquidity-preference theory, what is in excess and for how long?

a.	The supply of money is in excess until the interest rate increases.
b.	The supply of money is in excess until the interest rate decreases.
c.	The demand for money is in excess until the interest rate increases.
d.	The demand for money is in excess until the interest rate decreases.

____   25.   Which of the following is an effect of an increase in the interest rate?

a.	People put more money in their savings accounts.
b.	Foreign citizens decide to buy fewer Canadian bonds.
c.	Firms decide to purchase new machinery.
d.	People decide to consume more.

____   26.   According to the liquidity-preference theory, how does an increase in the price level affect the interest rate?

a.	It increases the money demand and the interest rate.
b.	It lowers the money demand and the interest rate.
c.	It increases the money demand and lowers the interest rate.
d.	It lowers the money demand and increases the interest rate.

____   27.   Assume that the MPCis 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $400 billion shift the aggregate demand curve?

a.	It will shift the aggregate demand curve left by $150 billion.
b.	It will shift the aggregate demand curve left by $250 billion.
c.	It will shift the aggregate demand curve right by $750 billion.
d.	It will shift the aggregate demand curve right by $1600 billion.

____   28.   In a small open economy with a flexible exchange rate, an expansionary fiscal policy will cause which of the following to happen?

a.	It will cause the dollar to depreciate.
b.	It will cause the dollar to appreciate.
c.	It will cause net exports to increase.
d.	It will cause a lasting effect on aggregate demand.

Figure 15-2

____   29.   Refer to the Figure 15-2. In a closed economy, which of the following would cause the aggregate demand curve to shift from AD to AD*?

a.	an increase in government purchases
b.	a decrease in stock prices
c.	an increase in consumer and firm optimism about the future
d.	an increase in the price level

____   30.   If the Bank of Canada maintains a fixed exchange rate, which of the following effects will an expansionary fiscal policy have?

a.	It will cause a large and permanent rightward shift in the AD curve.
b.	It will cause a large and permanent leftward shift in the AD curve.
c.	It will have no permanent effect on the position of the AD curve, but it will cause interest rates to rise.
d.	It will have no permanent effect on either the position of the AD curve or the interest rate.

Answer 1

22. Answer is option (B).

Explanation: Liquidity preference theory was given keynes. The theory helps in determining interest rate such that money demanded equals money supplied.  

The theory can help in determining interest rate in short run only. It can not be used to determine interest rate in long run. This is one of the criticism of Keynesian theory of liquidity preference.

Hence, the answer is - Short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance.