15. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and
AD3 labels indicate the levels of investment spending associated with each curve. All
figures are in billions. If aggregate demand is AD3 and the monetary authorities desire to
reduce it to AD 2, they should:
A) increase the interest rate from 3 percent to 9 percent.
B) increase the money supply from $100 to $120.
C) decrease the money supply from $120 to $100.
D) decrease the interest rate from 3 percent to 9 percent.
Use the following to answer question 16:
16. Refer to the above table. Suppose the Central Bank reduces the interest rate from 6 to 5
percent at a time when the investment demand declines from that shown by columns (1)
and (2) to that shown by columns (1) and (3). As a result of these two occurrences,
investment will:
A) increase by $10 billion.
B) decrease by $10 billion.
C) increase by $20 billion.
D) decrease by $20 billion.
17. Commercial banks usually hold only small amounts of excess reserves because:
A) the presence of such reserves tends to boost interest rates and reduce investment.
B) the Central Bank constantly uses open market operations to eliminate excess reserves.
C) the Central Bank does not pay interest on reserves.
D) the Central Bank does not want commercial banks to be too liquid.
18. All else equal, when the Central Bank engages in an easy money policy, the interest
rates received on government bonds usually:
A) fall.
B) rise.
C) remain constant.
D) move in the same direction as the bonds’ price.
19. The net export effect:
A) strengthens the stimulative effect of an expansionary fiscal policy.
B) weakens the stimulative effect of an easy money policy.
C) strengthens the stimulative effect of an easy money policy.
D) has no perceptible impact on stabilization policies.
20. A contraction of the money supply:
A) increases the interest rate and decreases aggregate demand.
B) increases both the interest rate and aggregate demand.
C) lowers the interest rate and increases aggregate demand.
D) lowers both the interest rate and aggregate demand.
21. Assuming government wishes to either increase or decrease the level of aggregate
demand, which of the following pairs are not consistent policy measures?
A) a tax increase and an increase in the money supply
B) a tax reduction and an increase in the money supply
C) a reduction in government expenditures and a decline in the money supply
D) a tax increase and an increase in the interest rate
22. The traditional Phillips Curve suggests a tradeoff between:
A) price level stability and income equality.
