Question

1A.

The IS curve is downward sloping for which of the following reasons?

		lower interest rates increase investment spending
		Lower interest rates stimulate money growth
		lower interest rates stimulate investment which then generates a multiplier effect on income
		money growth creates a multiplier effect on spending

1B. In Keynes' liquidity theory of the interest rate wealth is considered fixed and individuals choose a portfolio of which of the following two assets

		bonds and stocks
		debt and equity
		bonds, and commodities
		money and bonds

1C. For Keynes swings in investor expectations could be wild, erratic and characterized by herd behavior. Keynes called these investor sentiments?

		The Efficient Market Hypothesis
		animal spirits
		optimal forecasts
		gambling

1D.

The figure depicts the effect of a decline in the real interest rate on investment. What could move the market to a point located at r1 and I0 ?

		In increase in the interest rate
		a decline in the interest rate
		Bearishness
		Bullishness

Answer 1

1A. The IS curve is downward sloping for which of the following reasons?

lower interest rates increase investment spending, as a result when interest rate falls, Investment rises which leads to a greater income.

The IS curve is the set of combinations of interest rate (r) and national income (Y) that keep the goods market in equilibrium. If the interest rate r decreases, business demand for investment will increase, and so it will have a multiplier consumer demand.

...

1B. In Keynes' liquidity theory of the interest rate wealth is considered fixed and individuals choose a portfolio of which of the following two assets

money and bonds

Keynes treated money also as a store of value because it is an asset in which an individual can store his (her) wealth. To Keynes an individual’s total wealth consisted of money and bonds. Keynes used the term ‘bonds’ to refer to all risky assets other than money. So money holding was the only alternative to holding bonds. And the only determinant of an individual’s portfolio choice was the interest rate on bonds.

...

1C. For Keynes swings in investor expectations could be wild, erratic and characterized by herd behavior. Keynes called these investor sentiments?

Animal spirits

Animal spirits was a term coined by the famous British economist, John Maynard Keynes, to describe how people arrive at financial decisions, including buying and selling securities, in times of economic stress or uncertainty. Today, animal spirits describe the psychological and emotional factors that drive investors to take action when faced with high levels of volatility in the capital markets.