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aggregate supply.
119. According to liquidity preference theory, a decrease in the price level causes the interest rate to
a.
increase, which increases the quantity of goods and services demanded.
b.
increase, which decreases the quantity of goods and services demanded.
c.
decrease, which increases the quantity of goods and services demanded.
d.
decrease, which decreases the quantity of goods and services demanded.
120. According to the theory of liquidity preference, an increase in the price level causes the
a.
interest rate and investment to rise.
b.
interest rate and investment to fall.
c.
interest rate to rise and investment to fall.
d.
interest rate to fall and investment to rise.
121. According to the theory of liquidity preference, a decrease in the price level causes the
a.
interest rate and investment to rise.
b.
interest rate and investment to fall.
c.
interest rate to rise and investment to fall.
d.
interest rate to fall and investment to rise.
122. According to liquidity preference theory, if the price level
a.
fell, the interest rate would rise, and induce investment spending to rise.
b.
fell, the interest rate would fall, and induce investment spending to fall.
c.
rose, the interest rate would rise, and induce investment spending to fall.
d.
rose, the interest rate would fall, and induce investment spending to rise.
123. The most important reason for the slope of the aggregate-demand curve is that as the price level
a.
increases, interest rates increase, and investment decreases.
b.
increases, interest rates decrease, and investment increases.
c.
decreases, interest rates increase, and investment increases.
d.
decreases, interest rates decrease, and investment decreases.
124. Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-
demand curve?
a.
As the money supply increases, the interest rate falls, so spending rises.
b.
As the money supply increases, the interest rate rises, so spending falls.
c.
As the price level increases, the interest rate falls, so spending rises.
d.
As the price level increases, the interest rate rises, so spending falls.
125. Other things the same, as the price level rises,
a.
the interest rate rises causing aggregate demand to shift.
b.
the interest rate rises causing a movement along a given aggregate-demand curve.
c.
the interest rate falls causing aggregate demand to shift.
d.
the interest rate falls causing a movement along a given aggregate-demand curve.
126. Which of the following properly describes the interest-rate effect?
a.
A higher price level leads to higher money demand; higher money demand leads to higher interest rates; a
higher interest rate increases the quantity of goods and services demanded.
b.
A higher price level leads to higher money demand; higher money demand leads to lower interest rates; a
higher interest rate reduces the quantity of goods and services demanded.
c.
A lower price level leads to lower money demand; lower money demand leads to lower interest rates; a lower
interest rate reduces the quantity of goods and services demanded.
d.
A lower price level leads to lower money demand; lower money demand leads to lower interest rates; a lower
interest rate increases the quantity of goods and services demanded.
127. In the short run, an increase in the money supply causes interest rates to
a.
increase, and aggregate demand to shift right.
b.
increase, and aggregate demand to shift left.
c.
decrease, and aggregate demand to shift right.
d.
decrease, and aggregate demand to shift left.
128. An increase in the money supply will
a.
increase interest rates, decreasing investment and aggregate demand.
b.
reduce interest rates, increasing investment and aggregate demand.
c.
reduce interest rates, decreasing investment and increasing aggregate demand.
d.
increase interest rates, increasing investment and aggregate demand.
129. In the short run, a decrease in the money supply causes interest rates to
a.
increase, and aggregate demand to shift right.
b.
increase, and aggregate demand to shift left.
c.
decrease, and aggregate demand to shift right.
d.
decrease, and aggregate demand to shift left.
130. If the Federal Reserve decided to raise interest rates, it could
a.
buy bonds to lower the money supply.
b.
buy bonds to raise the money supply.
c.
sell bonds to lower the money supply.
d.
sell bonds to raise the money supply.
131. Which of the following shifts aggregate demand to the right?
a.
an increase in the price level
b.
an increase in the money supply
c.
a decrease in the price level
d.
a decrease in the money supply
132. Which of the following shifts aggregate demand to the left?
a.
an increase in the price level
b.
an increase in the money supply
c.
a decrease in the price level
d.
a decrease in the money supply
133. Which of the following shifts aggregate demand to the right?
a.
The price level rises.
b.
The price level falls.
c.
The money supply falls.
d.
None of the above is correct.
134. Which of the following shifts aggregate demand to the right?
a.
The price level rises.
b.
The price level falls.
c.
The Fed purchases government bonds on the open market.
d.
None of the above is correct.
135. If the Fed conducts open-market sales, the money supply
a.
increases and aggregate demand shifts right.
b.
increases and aggregate demand shifts left.
c.
decreases and aggregate demand shifts right.
d.
decreases and aggregate demand shifts left.
136. If the Fed conducts open-market sales, which of the following quantities increase(s)?
a.
interest rates, prices, and investment spending
b.
interest rates and prices, but not investment spending
c.
interest rates and investment, but not prices
d.
interest rates, but not investment or prices
137. If the Fed conducts open-market purchases, the money supply
a.
increases and aggregate demand shifts right.
b.
increases and aggregate demand shifts left.
c.
decreases and aggregate demand shifts right.
d.
decreases and aggregate demand shifts left.
138. If the Fed conducts open-market purchases, then which of the following quantities increase(s)?
a.
interest rates and investment spending
b.
interest rates, but not investment spending
c.
investment spending, but not interest rates
d.
neither interest rates nor investment spending
139. In which of the following cases does the aggregate-demand curve shift to the right?
a.
The price level rises, causing the interest rate to fall.
b.
The price level falls, causing the interest rate to fall.
c.
The money supply increases, causing the interest rate to fall.
d.
The money supply decreases, causing the interest rate to fall.
140. In the short run, open-market purchases
a.
increase investment and real GDP, and decrease nominal interest rates.
b.
increase real GDP and nominal interest rates, and decrease investment.
c.
increase investment and nominal interest rates, and decrease real GDP.
d.
decrease investment, nominal interest rates, and real GDP.
141. In the short run, open-market sales
a.
increase the price level and real GDP.
b.
decrease the price level and real GDP.
c.
increases the price level and decreases real GDP.
d.
decreases the price level and increases real GDP.
142. In recent years, the Federal Reserve has conducted policy by setting a target for
a.
bank reserves.
b.
the monetary growth rate.
c.
the exchange rate.
d.
the federal funds rate.
143. The Federal Funds rate is the interest rate
a.
banks charge each other for short-term loans.
b.
the Fed charges depository institutions for short-term loans.
c.
the Fed pays on deposits.
d.
interest rate on 3 month Treasury bills.
144. In recent years, the Fed has chosen to target interest rates rather than the money supply because
a.
Congress passed a law requiring them to do so.
b.
the President requested them to do so.
c.
the money supply is hard to measure with sufficient precision.
d.
changes in the interest rate change aggregate demand, but changes in the money supply do not.
145. The theory of liquidity preference illustrates the principle that
a.
monetary policy can be described either in terms of the money supply or in terms of the interest rate.
b.
monetary policy can be described either in terms of the exchange rate or the interest rate.
c.
monetary policy must be described in terms of the money supply.
d.
monetary policy must be described in terms of the interest rate.
146. If the interest rate is above the Fed's target, the Fed should
a.
buy bonds to increase the money supply.
b.
buy bonds to decrease the money supply.
c.
sell bonds to increase the money supply.
d.
sell bonds to decrease the money supply.
147. To stabilize interest rates, the Federal Reserve will respond to an increase in money demand by
a.
buying government bonds, which decreases the supply of money.
b.
selling government bonds, which increases the supply of money.
c.
buying government bonds, which increases the supply of money.
d.
selling government bonds, which decreases the supply of money.
148. If the interest rate is above the Fed's target, the Fed should
a.
buy bonds to increase bank reserves.
b.
buy bonds to decrease bank reserves.
c.
sell bonds to increase bank reserves.
d.
sell bonds to decrease bank reserves.
149. When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through
a.
sales of government bonds, which reduces interest rates and causes people to hold less money.
b.
purchases of government bonds, which reduces interest rates and causes people to hold less money.
c.
purchases of government bonds, which reduces interest rates and causes people to hold more money.
d.
sales of government bonds, which reduces interest rates and causes people to hold more money.
150. When the Federal Reserve increases the Federal Funds target rate, it achieves this target by
a.
purchasing government bonds. This action will reduce investment and shift aggregate demand to the right.
b.
purchasing government bonds. This action will increase investment and shift aggregate demand to the right.
c.
selling government bonds. This action will reduce investment and shift aggregate demand to the left.
d.
selling government bonds. This action will increase investment and shift aggregate demand to the left.
151. If the interest rate is below the Fed's target, the Fed would
a.
buy bonds to increase the money supply.
b.
buy bonds to decrease the money supply.
c.
sell bonds to increase the money supply.
d.
sell bonds to decrease the money supply.
152. If the interest rate is below the Fed's target, the Fed should
a.
buy bonds to increase bank reserves.
b.
buy bonds to decrease bank reserves.
c.
sell bonds to increase bank reserves.
d.
sell bonds to decrease bank reserves.
153. The Fed is concerned about stock market booms because the booms
a.
increase consumption spending.
b.
increase investment spending.
c.
increase both consumption and investment spending.
d.
None of the above is correct.
154. Which of the following actions might we logically expect to result from rising stock prices?
a.
Jim decreases his consumption spending.
b.
Firms sell fewer shares of new stock.
c.
Firms spend more on investment.
d.
None of the above is correct.
155. If the stock market booms, then
a.
aggregate demand increases, which the Fed could offset by increasing the money supply.
b.
aggregate supply increases, which the Fed could offset by increasing the money supply.
c.
aggregate demand increases, which the Fed could offset by decreasing the money supply.
d.
aggregate supply increases, which the Fed could offset by decreasing the money supply.
156. If the stock market booms, then
a.
aggregate demand increases, which the Fed could offset by purchasing bonds.
b.
aggregate supply increases, which the Fed could offset by selling bonds.
c.
aggregate demand increases, which the Fed could offset by selling bonds.
d.
aggregate supply increases, which the Fed could offset by purchasing the money supply.
157. If the stock market crashes, then
a.
aggregate demand increases, which the Fed could offset by increasing the money supply.
b.
aggregate demand increases, which the Fed could offset by decreasing the money supply.
c.
aggregate demand decreases, which the Fed could offset by increasing the money supply.
d.
aggregate demand decreases, which the Fed could offset by decreasing the money supply.
158. If the stock market crashes, then
a.
aggregate demand decreases, which the Fed could offset by purchasing bonds.
b.
aggregate demand decreases, which the Fed could offset by selling bonds.
c.
aggregate demand increases, which the Fed could offset by selling bonds.
d.
aggregate demand increases, which the Fed could offset by purchasing the money supply.
159. Suppose that the Federal reserve is concerned about the effects of falling stock prices on the economy. What could it
do?
a.
buy bonds to raise the interest rate
b.
buy bonds to lower the interest rate
c.
sell bonds to raise the interest rate
d.
sell bonds to raise the interest rate
160. When the Fed decreases the money supply, we expect
a.
interest rates and stock prices to rise.
b.
interest rates and stock prices to fall.
c.
interest rates to rise and stock prices to fall.
d.
interest rates to fall and stock prices to rise.
161. When the Fed increases the money supply, we expect
a.
interest rates and stock prices to rise.
b.
interest rates and stock prices to fall.
c.
interest rates to rise and stock prices to fall.
d.
interest rates to fall and stock prices to rise.
162. Changes in the interest rate help explain
a.
only the slope of, not shifts of aggregate demand.
b.
only shifts of, not the slope of aggregate demand.
c.
both the slope of and shifts of aggregate demand.
d.
neither the slope nor shifts of aggregate demand.
163. Changes in the interest rate
a.
shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or
monetary policy.
b.
shift aggregate demand if they are caused by changes in the price level, but not if they are caused by changes
in fiscal or monetary policy.
c.
shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes
in the price level.
d.
do not shift aggregate demand.
164. Because the liquidity-preference framework focuses on the
a.
short run, it assumes the price level adjusts to bring the money market to equilibrium.
b.
short run, it assumes the interest rate adjusts to bring the money market to equilibrium.
c.
long run, it assumes the price level adjusts to bring the money market to equilibrium.
d.
long run, it assumes the interest rate adjusts to bring the money market to equilibrium.
