Question

Question 1 The theory of liquidity preference implies that the equilibrium in the money market is achieved by adjustments in Not yet answered Select one: Marked out of 2.00 a. the interest rate. P Flag question b. the aggregate demand. c. the menu cost. O d. real wealth. Question 2 Assume that the multiplier is 6. If there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to Not yet answered Marked out of 2.00 p Flag question Select one: a. increase by $250 billion. b. increase by $333 billion. C. increase by $360 billion. d. None of the above are correct. Question 3 Assume that the theory of liquidity preference holds. Other things being equal, an increase in the interest rate decreases the money demand but does not shift the money demand curve. Not yet answered Marked out of 2.00 Select one: p Flag question True O False

Answer 1

1) Answer is A. Interest rate

Liquidity preference shows that there is negative relation between demand for money and interest rate.

2) Answer is C. $360

Change in aggregate demand = Value of multiplier * change in expenditure = 6 * 60 = 360.

3) True.

Interest rate is on horizontal axis, so as the interest rate increases there is left side movement on the curve. So there is no shift.

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