Question

Select TRUE/FALSE or SELECT A,B,C,D

10. According to the liquidity preference theory of interest rates, if the federal reserve increases interest rates there will be a reduction in (A: consumer savings), (B: Business purchases of new equipment), (C: Consumer purchases of newely issued bonds), (D: all of the above)

11. The classical theory of interest assumed that banks would make off of their savings deposits available for lending and that business borrowers would borrow more at a lower interest rate.

12. In the liquidity trap, monetary policy generates a perverse effect on interest rates, causing rates to return to negative in real terms.

13. If a reduction in the value of your house causes you to spend less of your income on consumer goods, you are exhibiting, (A: The housing bubbling effect), (B: The consumption effect), (C: a reduction in your marginal propensity to consume), (D: the wealth effect)

14. According to the "Credit Availability" channel of monetary policy transmissio, a monetary policy that reduced real interest rates would generate increased on, (A: Capital goods), (B: Residential Housing), (C: Automobiles), (D: All of these)

15. The bursting of the housing bubble in 2006 is attributed as the cause of the collapse of business and consumer cpending in 2009; this cause and effect linkage is an example of the (A: the crowding out effect), (B: Cost of capital effect), (C: Wealth effect), (D: Bank Lending Effect)

Answer 1

10. According to the liquidity preference theory of interest rates, if the federal reserve increases interest rates there will be a reduction in (B: Business purchases of new equipment)
Exp: There is invesrse relation between interest rate and investment

11. The classical theory of interest assumed that banks would make off of their savings deposits available for lending and that business borrowers would borrow more at a lower interest rate.
True

13. If a reduction in the value of your house causes you to spend less of your income on consumer goods, you are exhibiting, (D: the wealth effect)

15. The bursting of the housing bubble in 2006 is attributed as the cause of the collapse of business and consumer cpending in 2009; this cause and effect linkage is an example of the C: Wealth effect)