Question

What happens when the price level rises?

a.        Interest rates rise, so firms increase investment.

b.        Interest rates rise, so firms decrease investment.

c.        Interest rates fall, so firms increase investment.

d.        Interest rates fall, so firms decrease investment.

44.       Which of the following shifts 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

45.       If the world real interest rate exceeds the Canadian real interest rate, what would Canadian savers most likely do?

a.        Canadian savers would prefer to buy foreign assets.

b.        Canadian savers would prefer to buy Canadian assets.

c.        Canadian savers will prefer to wait until the two real interest rates are again equal.

d.        Canadian savers will sell their foreign assets and buy Canadian assets instead.

Suppose there was an economic contraction caused by a shift in aggregate supply. Further, suppose the central bank changes the money supply to offset the effects of that contraction. How would the effects of the change in money supply be reflected in the aggregate demand and aggregate supply model?

a.        aggregate supply would shift to the right.

b.        Aggregate supply would shift to the left.

c.        Aggregate demand would shift to the right.

d.        Aggregate demand would shift to the left.

Answer 1

43.

When price level increase in the economy, then people like to hold more money than in bond. So money demand shifts upward, so interest rate increase. So investment by firm decrease.

Hence option b is the correct answer.

44.

With the decrease in the price level money required for purchasing the same basket of goods decrease, so money demand decrease. Hence money demand curve shifts downward.

Hence option b is the correct answer.

45.

Since world real interest rate is greater than the Canadian real interest rate, so it is profitable for Canadian saver to purchase foreign assets.

Hence option a is the correct answer.

46.

Since due to shock in the economy, AS curve shifts leftward. For offsetting this effect Central Bank need to use expansionary monetary policy and so money supply curve shifts rightward. So interest rate decrease. Hence investment increase. So aggregate supply curve shifts rightward.

Hence option a is the correct answer.