Impact of Monetary and Fiscal Policies on Aggregate Demand-A

The liquidity preference theory of the interest rate suggests that the interest rate is determined by

• aggregate supply and aggregate demand.

• aggregate supply and aggregate demand.

• the supply and demand for money.

• the supply and demand for labor.

When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level

• shifts money demand to the right and increases the interest rate.

• shifts money demand to the right and decreases the interest rate.

• shifts money demand to the left and increases the interest rate.

• shifts money demand to the left and decreases the interest rate.

The initial effect of an increase in the money supply is to

• increase the interest rate.

• increase the price level.

• decrease the price level.

• decrease the interest rate.

An increase in the interest rate increases the quantity demanded of money because it increases the rate of return on money.

• True

• False

On the graph that depicts the theory of liquidity preference

• the demand-for-money curve is vertical.

• the supply-of-money curve is vertical.

• the interest rate is measured along the horizontal axis

• the price level is measured along the vertical axis