Review Chapter 35

According to the liquidity preference theory, an increase in the overall price level of 10 percent

• increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded

• decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded

• increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged

• decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged

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

According to liquidity preference theory, the opportunity cost of holding money is

• the interest rate on bonds

• the inflation rate

• the cost of converting bonds to a medium of exchange

• the difference between the inflation rate and the interest rate on bonds

Refer to Figure 34-2.  As we move from one point to another along the money-demand curve MD₁,

• the price level is held fixed at P₁

• the interest rate is held fixed at r₁

• the money supply is changing so as to keep the money market in equilibrium

• the expected inflation rate is changing so as to keep the real interest rate constant

Fiscal policy refers to the idea that aggregate demand is affected by changes in

• the money supply

• government spending and taxes

• trade policy

• All of the above are correct

The marginal propensity to consume (MPC) is defined as the fraction of

• extra income that a household consumes rather than saves

• extra income that a household either consumes or saves

• total income that a household consumes rather than saves

• total income that a household either consumes or saves

If the MPC = 3/5, then the government purchases multiplier is

• 5/3

• 5/2

• 5

• 15

If the multiplier is 5, then the MPC is

• 0.05

• 0.5

• 0.6

• 0.8

Which of the following policy actions shifts the aggregate-demand curve?

• an increase in the money supply

• an increase in taxes

• an increase in government spending

• All of the above are correct

Government purchases are said to have a

• multiplier effect on aggregate supply

• multiplier effect on aggregate demand

• liquidity-enhancing effect on aggregate supply

• liquidity-enhancing effect on aggregate demand