1. The reason that velocity increases when interest rates rise is a. the Fed enc
ID: 1110044 • Letter: 1
Question
1. The reason that velocity increases when interest rates rise is a. the Fed encourages banks to turn money in faster for recycling, which causes money to move faster. b. the opportunity cost of saving increases, so people hold smaller cash balances. c. home mortgage payments increase, so people write larger checks that reduces their checking account balances d. the opportunity cost of holding money increases, so average money balances decrease. 2. If economists say that a 7 percent growth in percent, they are assuming that velocity the money supply will increase aggregate demand by7 _ - a. will decrease. b. is constant. c. will increase. d. is unpredictable. 3. If resource prices are fixed and the selling price of the output rises, then a. Firm profits will decrease. b. Firm profits will increase. c. Firm profits will remain constant. d. Both firm profits and output will decrease. 4. If the Fed raises the Federal Funds Rate, what will be the effect on the money supply? a. It will decrease the money supply. b. It will increase the money supply. c. No change in the money supply d. Not enough data to give an answer. 5. Which of the following is not true for an economy that is experiencing liquidity tra a. Investment and output would remain constant when money supply increases b. Increase in money supply will result a decrease in r c. Money demand curve is horizontal d. Interest rate is not sensitive to change in money supplyExplanation / Answer
1.d , velocity tells us rate at which money is exchanged in transactions since interest rate increases this means spending is less saving is more and thus average money balances decreases.
2. b , By quantity theory of money M*V = P*Y . Thus if M and P*Y increases at same rate then V is constant.
3. b, profits are revenue minus cost if price of good increases revenue will increase and cost remaining same profits will increase
4. a, money supply will fall as people will be reluctant to borrow due to high rates.
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