Question

1. 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 will increase interest rates and decrease interest-sensitive consumption and investment spending

2. The real-balances effect on aggregate demand suggests that a:

A. Lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending

B. Lower price level will decrease the real value of many financial assets and therefore cause an increase in spending

C. Lower price level will increase the real value of many financial assets and therefore cause an increase in spending

D. Higher price level will increase the real value of many financial assets and therefore cause an increase in spending

3. The foreign purchases, interest rate, and real-balances effects explain why the:

A. Aggregate demand curve is downward-sloping

B. Aggregate demand curve may shift to the left or right

C. Economy will adjust towards equilibrium

D. Aggregate expenditures schedule may shift up or down

4. A decrease in interest rates caused by a change in the price level would cause a(n):

A. Decrease (or shift left) in aggregate demand

B. Increase (or shift right) in aggregate demand

C. Decrease in the quantity of real output demanded (or movement up along AD)

D. Increase in the quantity of real output demanded (or movement down along AD)

5. An increase in personal income tax rates will cause a(n):

A. Decrease (or shift left) in aggregate demand

B. Increase (or shift right) in aggregate demand

C. Decrease in the quantity of real output demanded (or movement up along AD)

D. Increase in the quantity of real output demanded (or movement down along AD)

Answer 1

(1) (B)

Lower (higher) price level will reduce (raise) money demand, thus reducing (raising) interest rate, which increases (decreases) consumption & investment, increasing (decreasing) AD.

(2) (C)

Lower (higher) price level will increase (decrease) consumption, increasing (decreasing) AD.

(3) (A)

These effects explain the downward slope of AD curve.

(4) (B)

Lower interest rate increases consumption & investment. AD increases, shifting AD curve to right.

(5) (A)

Higher tax lowers consumption. AD decreases, shifting AD curve to left.