Question

2. Which of the following statements about aggregate demand is (are) correct? (x) The wealth effect helps explain the slope of the aggregate demand curve. This effect is relatively unimportant in the United States because money holdings are a small part of consumer wealth. (y) The interest-rate effect depends on the idea that increases in interest rates decrease the quantity of goods and services demanded. The interest-rate effect is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. A. (x), (y) and (2) B. (x) and (y) only C. (x) and (2) only D. (y) and (z) only E. (2) only 3. Which of the following statements is (are) correct? (x) A higher price level leads to higher money demand, higher money demand leads to higher interest rates, and a higher interest rate reduces the quantity of goods and services demanded. y Changes in interest rates are relatively important in the United States because investment spending and spending on housing is usually responsive to interest rate changes in the U.S. (zInterest rate changes that affect the level of investment spending at any price level are illustrated as a shift of the aggregate demand curve A (x). (y) and (2) B. (x) and (y) only C. (x) and (z) only D. (y) and (z) only E (z) only Monetary policy A must be described in terms of tax rate targets. B. must be described in terms of interest-rate targets. must be described in terms of money supply targets. o can be descnbed either in terms of the money supply or in terms of the interest rate E cannot be accurately described in terms of the interest rate or in terms of the money supply

Answer 1

2. (D)

Reason:

The econometric model of the U.S. economy used by the Federal Reserve has included a wealth effect for all this time, one that suggests that an additional dollar of household wealth leads, over time, to a permanent rise in household consumption of about three to five cents.

The first reason for the downward slope of the aggregate demand curve is Pigou's wealth effect. Recall that the nominal value of money is fixed, but the real value is dependent upon the price level. This is because for a given amount of money, a lower price level provides more purchasing power per unit of currency

There are three basic reasons for the downward sloping aggregate demand curve. These are Pigou's wealth effect, Keynes's interest-rate effect, and Mundell-Fleming's exchange-rate effect. These three reasons for the downward sloping aggregate demand curve are distinct, yet they work together.

The most immediate effect is usually on capital investment. When interest rates rise, the increased cost of borrowing tends to reduce capital investment, and as a result, total aggregate demand decreases. Conversely, lower rates tend to stimulate capital investment and increase aggregate demand.

3.(A)

Reason:

When the price level falls, consumers are wealthier, a condition which induces more consumer spending. Thus, a drop in the price level induces consumers to spend more, thereby increasing the aggregate demand. The second reason for the downward slope of the aggregate demand curve is Keynes's interest-rate effect.

A low interest rate increases the demand for investment as the cost of investment falls with the interest rate. Thus, a drop in the price level decreases the interest rate, which increases the demand for investment and thereby increases aggregate demand.

Interest rates are determined by the fed funds rate and demand for U.S. ... Until the housing boom in the early 2000s, variable mortgage rates changed in line

4. C

Reason:

Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate. It also impacts business expansion, net exports, employment, the cost of debt and the relative cost of consumption versus saving—all of which directly or

indirectly impact aggregate demand