Question

37. Based on_____, changes in the interest rate bring the money market into equilibrium.

a. classical theory, but not liquidity preference theory.

b. neither liquidity preference theory nor classical theory.

c. liquidity preference theory, but not classical theory.

d. both liquidity preference theory and classical theory

38. A housing market boom may lead to ____

a. increases in aggregate supply, which the center bank could offset by increasing the money supply.

b. increases in aggregate demand, which the center bank could offset by decreasing the money supply.

c. increases in aggregate supply, which the center bank could offset by decreasing the money supply.

d. increases in aggregate demand, which the center bank could offset by increasing the money supply.

40. During the World War II, both the price level and real output increased in the U.S. If we know that during this period, the long-run aggregate supply curve shifted right because of the war, then what would have to have happened to aggregate demand so that we could observe these changes in price and output?

a. It would have to have shifted right by less than aggregate supply shifted

b. It would have to have to shifted right by more than aggregate supply shifted.

c. It would have to have shifted left by less than aggregate supply shifted

d. It would have to have to shifted left by more than aggregate supply shifted.

Answer 1

1) a

According to th classical theory of money market it is a interest rate that brings the money market into equilibrium. Money market is in equilibrium where savings are equal to the investment. Savings are the positive function of interest rate whereas investment is the inversely related to interest rate. So that changes in interest rate brings the money market into equilibrium.

According to liquidity preference the demand for money is the inverse function of interest rate. Liquidity preference is associated with demand for money only is does not tell about supply of money (savings) and money market equilibrium.

2) b

Housing market boom generally associated with the increase in aggregate demand, which Central bank could offset by decreasing money supply. Housing market boom refers to the increase in the house prices which makes people to become wealthier which leads to increase in aggregate demand including demand for housing. Decrease in money supply create a shortfall of loanable funds in the economy and thereby decreases aggregate demand.

3) b

If the long run aggregate supply curve shifted to the right because of the war the aggregate demand curve would have to have to shifted right by more than aggregate supply shifted. Due to the shift in aggregate demand to the right and more than the aggregate supply curve will lead to increase in the output level and the price level from the intial one. There is the excess demand over the supply which leads to the increase in prices and real output.