Liquidity Preference Theory Quiz

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.

In which of the following cases would the quantity of money demanded be largest?

• r = 0.03, P = 1.4

• r = 0.03, P = 1.2

• r = 0.04, P = 1.2

• r = 0.06, P = 1.0

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

• interest rate

• money supply

• quantity of output

• price level

Refer to Figure 34-2. A decrease in Y from Y1 to Y2 is explained as follows:

• The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

• An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

• A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

• An increase in the price level causes the money-demand curve to shift from MD2 to MD1; this shift of MD causes r to decrease from r2 to r1; and this decrease in r causes Y to decrease from Y1 to Y2.

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.

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,

• investment is lower than it is when P = P1.

• nominal output is higher than it is when P = P1.

• the expected rate of inflation is higher than it is when P = P1.

• the velocity of money is higher than it is when P = P1.

According to liquidity preference theory, if the quantity of money demanded is greater than the quantity supplied, then the interest rate will

• increase and the quantity of money demanded will decrease.

• increase and the quantity of money demanded will increase.

• decrease and the quantity of money demanded will decrease.

• decrease and the quantity of money demanded will increase.

Which of the following events would shift money demand to the right?

• an increase in the interest rate or an increase in the price level

• an increase in the interest rate, but not an increase in the price level

• an increase in the price level, but not an increase in the interest rate

• neither an increase in the interest rate nor an increase in the price level

Which of the following events would shift money demand to the left?

• an increase in the interest rate or an increase in the price level

• an increase in the interest rate, but not an increase in the price level

• an increase in the price level, but not an increase in the interest rate

• neither an increase in the interest rate nor an increase in the price level

The multiplier for changes in government spending is calculated as

• MPC

• 1 − MPC

• 1 / MPC

• 1 / (1 − MPC)