The Influence of Monetary and Fiscal Policy on Aggregate Demand 8263
71. Refer to Figure 34-2. Assume the money market is always in equilibrium, and suppose r1 =
0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following
statements is correct?
a. When r = r2, nominal output is higher than it is when r = r1.
b. When r = r2, real output is higher than it is when r = r1.
c. When r = r2, the expected rate of inflation is higher than it is when r = r1.
d. If the velocity of money is 4 when r = r2, then the quantity of money is $3,000.
72. Refer to Figure 34-2. Assume the money market is always in equilibrium, and suppose r1 =
0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following
statements is correct? When P = P2,
a. investment is lower than it is when P = P1.
b. nominal output is higher than it is when P = P1.
c. the expected rate of inflation is higher than it is when P = P1.
d. the velocity of money is higher than it is when P = P1.
8264 The Influence of Monetary and Fiscal Policy on Aggregate Demand
Figure 34-3
73. Refer to Figure 34-3. What quantity is represented by the downward-sloping line on the left-
hand graph?
a. the supply of money
b. the demand for money
c. the rate of inflation
d. Aggregate Demand.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8265
74. Refer to Figure 34–3. Which of the following sequences (numbered arrows) shows the logic of
the interest-rate effect?
a. 1, 2, 3, 4
b. 1, 4, 3, 2
c. 3, 4, 2, 1
d. 3, 2, 1, 4
75. Refer to Figure 34–3. For an economy such as the United States, what component of the
demand for goods and services is most responsible for the decrease in output from Y1 to Y2?
a. consumption
b. investment
c. net exports
d. government spending
8266 The Influence of Monetary and Fiscal Policy on Aggregate Demand
76. According to liquidity preference theory, if the quantity of money demanded is greater than the
quantity supplied, then the interest rate will
a. increase and the quantity of money demanded will decrease.
b. increase and the quantity of money demanded will increase.
c. decrease and the quantity of money demanded will decrease.
d. decrease and the quantity of money demanded will increase.
77. When households find themselves holding too much money, they respond by
a. purchasing interest–earning financial assets and interest rates fall.
b. purchasing interest-earning financial assets and interest rates rise.
c. holding the extra money and interest rates rise.
d. selling interest-earning financial assets, which eliminates the excess supply of money.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8267
78. According to liquidity preference theory, if the quantity of money supplied is greater than the
quantity demanded, then the interest rate will
a. increase and the quantity of money demanded will decrease.
b. increase and the quantity of money demanded will increase.
c. decrease and the quantity of money demanded will decrease.
d. decrease and the quantity of money demanded will increase.
79. According to liquidity preference theory, if there were a surplus of money, then
a. the interest rate would be above equilibrium and the quantity of money demanded would be too
large for equilibrium.
b. the interest rate would be above equilibrium and the quantity of money demanded would be too
small for equilibrium.
c. the interest rate would be below equilibrium and the quantity of money demanded would be too
small for equilibrium.
d. the interest rate would be below equilibrium and the quantity of money demanded would be too
large for equilibrium.
8268 The Influence of Monetary and Fiscal Policy on Aggregate Demand
80. The interest rate would fall and the quantity of money demanded would
a. increase if there were a surplus in the money market.
b. increase if there were a shortage in the money market.
c. decrease if there were a surplus in the money market.
d. decrease if there were a shortage in the money market.
81. As the interest rate falls,
a. the quantity of money demanded falls, which would reduce a shortage.
b. the quantity of money demanded falls, which would reduce a surplus.
c. the quantity of money demanded rises, which would reduce a shortage.
d. the quantity of money demanded rises, which would reduce a surplus.
82. The interest rate falls if
a. the price level falls or the money supply falls.
b. the price level falls or the money supply rises.
c. the price level rises or the money supply falls.
d. the price level rises or the money supply rises.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8269
83. If, at some interest rate, the quantity of money demanded is less than the quantity of money
supplied, people will desire to
a. sell interest-bearing assets, causing the interest rate to decrease.
b. sell interest-bearing assets, causing the interest rate to increase.
c. buy interest-bearing assets, causing the interest rate to decrease.
d. buy interest-bearing assets, causing the interest rate to increase.
84. If, at some interest rate, the quantity of money supplied is less than the quantity of money
demanded, people will desire to
a. sell interest-bearing assets, causing the interest rate to decrease.
b. sell interest-bearing assets, causing the interest rate to increase.
c. buy interest-bearing assets, causing the interest rate to decrease.
d. buy interest-bearing assets, causing the interest rate to increase.
8270 The Influence of Monetary and Fiscal Policy on Aggregate Demand
85. Which of the following is correct?
a. A higher price level shifts money demand rightward.
b. When money demand shifts rightward, the interest rate rises.
c. A higher interest rate reduces the quantity of goods and services demanded.
d. All of the above are correct.
86. If the Fed increases the money supply,
a. the interest rate increases, which tends to raise stock prices.
b. the interest rate increases, which tends to reduce stock prices.
c. the interest rate decreases, which tends to raise stock prices.
d. the interest rate decreases, which tends to reduce stock prices.
87. When there is an excess supply of money,
a. people will try to get rid of money causing interest rates to rise. Investment increases.
b. people will try to get rid of money causing interest rates to fall. Investment decreases.
c. people will try to get rid of money causing interest rates to fall. Investment increases.
d. people will try to get rid of money causing interest rates to rise. Investment decreases.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8271
88. If there is excess demand for money, then people will
a. deposit more money into interest-bearing accounts, and the interest rate will fall.
b. deposit more money into interest-bearing accounts, and the interest rate will rise.
c. withdraw money from interest-bearing accounts, and the interest rate will fall.
d. withdraw money from interest-bearing accounts, and the interest rate will rise.
89. If there is excess money supply, people will
a. deposit more into interest-bearing accounts, and the interest rate will fall.
b. deposit more into interest-bearing accounts, and the interest rate will rise.
c. withdraw money from interest-bearing accounts, and the interest rate will fall.
d. withdraw money from interest-bearing accounts, and the interest rate will rise.
90. People might withdraw money from interest-bearing accounts,
a. making the interest rate fall, if there is a surplus in the money market.
b. making the interest rate rise, if there is a surplus in the money market.
c. making the interest rate fall, if there is a shortage in the money market.
d. making the interest rate rise, if there is a shortage in the money market.
8272 The Influence of Monetary and Fiscal Policy on Aggregate Demand
91. Which of the following statements is correct?
a. Both liquidity preference theory and classical theory assume the interest rate adjusts to bring
the money market into equilibrium.
b. Both liquidity preference theory and classical theory assume the price level adjusts to bring the
money market into equilibrium.
c. Liquidity preference theory assumes the interest rate adjusts to bring the money market into
equilibrium; classical theory assumes the price level adjusts to bring the money market into
equilibrium.
d. Liquidity preference theory assumes the price level adjusts to bring the money market into
equilibrium; classical theory assumes the interest rate adjusts to bring the money market into
equilibrium.
92. Changes in the interest rate bring the money market into equilibrium according to
a. both liquidity preference theory and classical theory.
b. neither liquidity preference theory nor classical theory.
c. liquidity preference theory, but not classical theory.
d. classical theory, but not liquidity preference theory.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8273
93. If the price level rises, then
a. the interest rate falls and spending on goods and services falls.
b. the interest rate falls and spending on goods and services rises.
c. the interest rate rises and spending on goods and services falls.
d. the interest rate rises and spending on goods and services rises.
94. According to the interest-rate effect, an increase in the price level will
a. increase money demand and interest rates. Investment declines.
b. increase money demand and interest rates. Investment increases.
c. increase money demand, reduce interest rates, and investment increases.
d. decrease money demand and interest rates. Investment declines.
8274 The Influence of Monetary and Fiscal Policy on Aggregate Demand
95. A surplus or shortage in the money market is eliminated by adjustments in the price level
according to
a. both liquidity preference theory and classical theory.
b. neither liquidity preference theory nor classical theory.
c. liquidity preference theory, but not classical theory.
d. classical theory, but not liquidity preference theory.
96. Which of the following statements is correct for the long run?
a. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to
balance the supply and demand for money; the price level adjusts to balance the supply and
demand for loanable funds.
b. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to
balance the supply and demand for loanable funds; the price level adjusts to balance the supply
and demand for money.
c. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to
balance the supply and demand for loanable funds; the price level is relatively slow to adjust.
d. Output responds to the aggregate demand for goods and services; the interest rate adjusts to
balance the supply and demand for loanable funds; the price level adjusts to balance the supply
and demand for money.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8275
97. Which of the following statements is correct for the short run?
a. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to
balance the supply and demand for money; the price level adjusts to balance the supply and
demand for loanable funds.
b. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to
balance the supply and demand for loanable funds; the price level adjusts to balance the supply
and demand for money.
c. Output responds to the aggregate demand for goods and services; the interest rate adjusts to
balance the supply and demand for money; the price level is relatively slow to adjust.
d. Output responds to the aggregate demand for goods and services; the interest rate adjusts to
balance the supply and demand for loanable funds; the price level adjusts to balance the supply
and demand for money.
98. The short-run effects on the interest rate are
a. shown equally well using either liquidity preference theory or classical theory.
b. best shown using classical theory.
c. best shown using liquidity preference theory.
d. not shown well by either liquidity preference theory or classical theory.
8276 The Influence of Monetary and Fiscal Policy on Aggregate Demand
99. An increase in the interest rate could have been caused by
a. a fall in the price level causing the money-demand curve to shift leftward.
b. a fall in the price level causing the money-demand curve to shift rightward.
c. a rise in the price level causing the money-demand curve to shift leftward.
d. a rise in the price level causing the money-demand curve to shift rightward.
100. The interest rate falls if
a. either money demand or money supply shifts right.
b. money demand shifts right or money supply shifts left.
c. either money demand or money supply shifts left.
d. money demand shifts left or money supply shifts right.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8277
101. People will want to hold more money if the price level
a. or if the interest rate increases.
b. or if the interest rate decreases.
c. increases or if the interest rate decreases.
d. decreases or if the interest rate increases.
102. People will want to hold less money if the price level
a. increases or if the interest rate increases.
b. decreases or if the interest rate decreases.
c. increases or if the interest rate decreases.
d. decreases or if the interest rate increases.
8278 The Influence of Monetary and Fiscal Policy on Aggregate Demand
103. If the interest rate decreases
a. or if the price level increases, then people will want to hold more money.
b. or if the price level increases, then people will want to hold less money.
c. or if the price level decreases, then people will want to hold more money.
d. or if the price level decreases, then people will want to hold less money.
104. Which of the following events would shift money demand to the right?
a. an increase in the price level
b. a decrease in the price level
c. an increase in the interest rate
d. a decrease in the interest rate
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8279
105. Which of the following events would shift money demand to the right?
a. an increase in the interest rate or an increase in the price level
b. an increase in the interest rate, but not an increase in the price level
c. an increase in the price level, but not an increase in the interest rate
d. neither an increase in the interest rate nor an increase in the price level
106. Which of the following events would shift money demand to the left?
a. an increase in the price level
b. a decrease in the price level
c. an increase in the interest rate
d. a decrease in the interest rate
8280 The Influence of Monetary and Fiscal Policy on Aggregate Demand
107. Which of the following events would shift money demand to the left?
a. an increase in the interest rate or an increase in the price level
b. an increase in the interest rate, but not an increase in the price level
c. an increase in the price level, but not an increase in the interest rate
d. neither an increase in the interest rate nor an increase in the price level
108. Assume the money market is initially in equilibrium. If the price level increases, then according to
liquidity preference theory there is an excess
a. supply of money until the interest rate increases.
b. supply of money until the interest rate decreases.
c. demand for money until the interest rate increases.
d. demand for money until the interest rate decreases.
The Influence of Monetary and Fiscal Policy on Aggregate Demand 8281
109. Assume the money market is initially in equilibrium. If the price level decreases, then according
to liquidity preference theory there is an excess
a. supply of money until the interest rate increases.
b. supply of money until the interest rate decreases.
c. demand for money until the interest rate increases.
d. demand for money until the interest rate decreases.
110. Other things the same, which of the following happens if the price level rises?
a. Money demand shifts rightward.
b. Initially there is an excess demand for money in the money market.
c. The interest rate rises.
d. All of the above are correct.
8282 The Influence of Monetary and Fiscal Policy on Aggregate Demand
111. According to liquidity preference theory, if the price level decreases, then
a. the interest rate falls because money demand shifts right.
b. the interest rate falls because money demand shifts left.
c. the interest rate rises because money supply shifts right.
d. the interest rate rises because money supply shifts left.
112. According to liquidity preference theory, if the price level increases, then the equilibrium interest
rate
a. rises and the aggregate quantity of goods demanded rises.
b. rises and the aggregate quantity of goods demanded falls.
c. falls and the aggregate quantity of goods demanded rises.
d. falls and the aggregate quantity of goods demanded falls.