Question

5. In the Keynesian model which of the following would be most likely to have the largest impact on aggregate demand a. an increase in the money supply b. a change in government expenditure c. a change in investment expectations d. both a and c e. both b and c 6. In the Keynesian theory of liquidity demand and the interest rate which of the following occurs during excess supply of money. a. individuals sell bonds, driving interest rates down b. individuals sell bonds, driving interest rates up c. individuals buy bonds, driving interest rates down d. individuals buy bonds driving interest rates up 7. In the Keynesian model how will a $500 increase in government spending effect savings. Assume the multiplier is 7.24 a. Saving will rise consumption fall b. Saving will rise by 500 c. Savings will be crowded out by rising income d. Savings depends upon the interest rate not the level of income 8. If the aggregate price level increases from PO to P1, what is true of real money balances a. real money balances decline b. real money balances increase c. the FED increases money supply, real money balances unchanged d. Not enough information

Answer 1

5) Change in the money supply has a large impact on aggregate demand. When money supply increases people have more money in hand, they increase their consumption as purchasing power increases and save less as interest rate fall so aggregate demand rise with full extent. On the other hand, when money supply decreases the opposite would have happened. So not only an increase in the money supply affect AD but also decrease in the money supply.

Change in government expenditure has an impact on AD. When government expenditure increases, AD rise but some crowded out because of the rise in interest rate decrease investment. So AD does not increase with full extent. On the other hand, when government expenditure decreases, AD fall but investment rise because of a fall in interest rate make it less costly which raises AD. So AD does not decrease with full extent.

Change in investment expectation has full impact on AD. When the economy runs good, investors expect high return so invest more which raises AD, The opposite happens when the economy is in a bad stage.

Therefore option c is correct.

6) During the excess supply of money, people have more money in their hand. And the price falls because of money supply increases. So investors want to buy more bonds now. Demand for bond increases which raises the price of the bond and decrease the interest rate. therefore option c is correct.

7)In equilibrium I+G=S+T

At fix level of I and T when G increases S will be increased by the same amount. option b is correct

8) true real money balance= M/P. When price increases M/P would fall if M is fixed. If M increases or decreases, real money balance will be depended on the intensity of the change in M and P. if money supply and price change at the same rate, real money balance will not be changed. Option d is correct