Question

The theory of liquidity preference implies that an increase in the price level shifts the Select one: a. money demand curve to the right, so the interest rate decreases. 0 b. money demand curve to the left, so the interest rate increases. C. money demand curve to the right, so the interest rate increases. d. money demand curve to the left, so the interest rate decreases. If the marginal propensity to consume is 6/7, then the multiplier is 7. Select one: 0 True O False The interest-rate effect is partially explained by the fact that a lower price level raises money demand. Select one: O True O False

Answer 1

1. c
(As price level increases, more money will be demanded which will shift Md curve to the right and thus interest rate will increase.)

2. True
(Multiplier = 1/(1-MPC) = 1/[1-(6/7)] = 1/(1/7) = 7)

3. False
(A lower price level decreases the money demand.)