20. The interest-rate effect on AD suggests that: A. a decrease in the supply of
ID: 1106102 • Letter: 2
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20. The interest-rate effect on AD suggests that: A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending B, an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C. D, an increase in the price level will decrease the demand for money, reduce interest rates, and 21. The real-balances effect on AD indicates that: increase consumption and investment spending. A. an increase in the price level will increase the demand for money, increase interest rates, and B. a lower price level will decrease the real value of money and therefore reduce spending. C. a higher price level will increase the real value of money and therefore increase spending. D. a higher price level will decrease the real value of money and therefore reduce spending. reduce consumption and investment spending. 22. If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes: A. the output effect. B. the international substitution effect. C. the real-balances effect. D. the shift-of-spending effect. 23. The real-balances, interest-rate, and international substitution effects all help explain: A. why the aggregate demand (AD) curve is downsloping B. why the short-run aggregate supply (SRAS) curve is upsloping. C. shifts in the aggregate demand (AD) curve. D. shifts in the short-run aggregate supply (SRAS) curve. 24. An increase in net exports will shift the AD A. left by a multiple of the change in C. I, or G B. left by the same amount as the change in C, I, or C. curve to the: the same amount as the change in C, I, or G a multiple of the change in C,I, or G 25. The aggregate supply A. relationship between priates the curve onsumet between prices and the natural rate of unemployment. B. s ndhe aegae quantity of goods and services purchased by governments, and foreigners (net exports). between the real wage rate and the quantity of labor supplied by househo the real wage rate and the quantity of labor supplied by households. D, quantity of goods anlgheantity qun aggrepate supply (SRAS) curve slopes upward and to the right because: shor uages and other resource prices completely offset changes in the price level. The ses in walis flexible upward but inflexible downward.Explanation / Answer
20) A - A decrease in the supply for money will increase interest rates and reduce interest sensitivity consumption and investment spending.
This is because, we know that LM = M/P, a reduction in money supply will shift the LM curve up to the left. An upward shift of LM causes interest rates to rise. An increased interest rates induces the customers to save more in the bank, rather than spending, thereby leading to reduced consumption. An increased interest rates also leads to reduced investment since borrowing becomes more expensive for the investors.
21). C - An increase in the price level will increase the demand for money, increase interest rates, and decrease investment and consumption spending.
This answer is based on our undersantding that LM curve = M/P(real demand for money) where M is the nominal demand for money, and P is the price level. The increase in price level will be led with an increase in the deam for nominal money in order to stay on the same LM curve. Now, an increased nominal demand for money will be met by increased interest induced by the government, so that the consumers are encouraged to save more instead of spending recklessly. An increased bank interest rates leads to savings by consumers, thereby reducing consumption. An increased interest rate is also met by reduced investment.
22) D - The international substitution effect
This is because as price levels in US increases, the citizens of US start demanding more of foreign commodities, thereby substituting the domestic products with international imported products.
23) A - why the aggregate demand curve is downward sloping.
This is because all three concepts are related to price levels. An increased price levels will essentially lead to lower real money demand, higher interest rates, and lower demand for domestic products, thereby moving upward along the AD demad curve. The opposite can be explained for lower prices - high real money demand, lower interest rates, higher demand for domestic products, thereby moving downward along the AD curve.
24). D -right by a multiple of the change in C,I, or G.
This is because a rightward shift in demand curve is also accompanied by crowding out due to increase in price level. Thus option D remains the most suitable of all the choices.
25), D - The quantity of goods and services producer will supply at different price levels.
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