In: Economics
1. In which situation does investment spending decrease?
A.when the price level rises, causing interest rates to fall
B.when the price level falls, causing interest rates to fall
C.when the price level rises, causing interest rates to rise
D.when the price level falls, causing interest rates to rise
2. If a central bank targets the interest rate, what does this imply?
A. The central bank must decrease the money supply if the interest rate is above its target.
B. The central bank can then set the money supply at whatever value it wants.
C. The central bank must increase the money supply if the interest rate is above its target.
D. The central bank must not change the money supply.
3. If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?
A. It has the same effect on aggregate demand than if households view the cut as permanent.
B. It has no effect on aggregate demand.
C. It has a stronger effect on aggregate demand than if households view the cut as permanent.
D. It has a weaker effect on aggregate demand than if households view the cut as permanent.
4. What is the most important automatic stabilizer?
A. government spending
B. welfare benefits
C. the tax system
D. unemployment compensation
Question 1 Answer :- when price level rises, causing interest rates to high.
Lower interest rates encourage additional investment spending,
which gives the economy a boost in times of slow economic growth.
The Federal Reserve Board, also referred to as "the Fed," is in
charge of setting interest rates for the United States through the
use of monetary policy. The Fed adjusts interest rates to affect
demand for goods and services. Interest rate fluctuations can have
a large effect on the stock market, inflation, and the economy as a
whole.Lowering interest rates is the Fed's most powerful tool to
increase investment spending in the U.S. and to attempt to steer
the country clear of recessions.
Ultimately, the Fed uses monetary policy to keep the economy
stable. In times of economic downturn, the Fed lowers interest
rates to encourage additional investment spending. When the economy
is growing and in good condition, the Fed takes measures to
increase interest rates slightly to keep inflation at bay. The Fed
controls the federal funds rate, which influences long-term
interest rates. The federal funds rate is the interest banking
institutions charge one another for overnight loans of reserves or
balances that are needed to meet minimum reserve requirements set
by the Fed. By setting the federal funds rate, the Fed indirectly
adjusts long-term interest rates, which increases investment
spending and eventually affects employment, output, and
inflation.
Changes in interest rates affect the public's demand for goods and
services and, thus, aggregate investment spending. A decrease in
interest rates lowers the cost of borrowing, which encourages
businesses to increase investment spending. Lower interest rates
also give banks more incentive to lend to businesses and
households, allowing them to spend more.