26. Expansionary fiscal policy – taken by itself – tends to raise interest rates

Question

26. Expansionary fiscal policy – taken by itself – tends to raise interest rates and the level of income.

27. Expansionary monetary policy tends to lower interest rates.

28. The greater the elasticity of the LM curve, the greater will be the effectiveness of fiscal policy (in terms of increasing income).

29. The more interest elastic the investment demand function, the more effective monetary policy will be.

30. The more interest elastic the investment demand function, the stronger will be the “crowding out” effect associated with a pure fiscal policy measure.

31. For equilibrium in the goods/commodity market (or, real sector), the higher the rate of interest, the lower the level of income must be.

32. Given a two sector model, at any point to the right of the IS curve, saving must exceed investment.

33. Using the IS – LM framework, in which model would monetary policy be more effective (in terms of increasing the level of income)? THINK IT THROUGH A. I = f (i) S = f (Y) G = Go B. I = f (i) S = f (Y) G = Go – g (i)

34. Using the IS – LM framework, in which model would monetary policy produce larger income changes (per unit of monetary stimulus)? THINK IT THROUGH A. Tx = Txo B. Tx = To + tY t > 0

35. Based on the equation of exchange, an increase in government spending can increase income if and only if it is financed by an increase in the money supply.

36. At any point to the right of the IS curve, total leakages must exceed total injections.

37. If velocity is rising, then the demand for money must be falling.

38. The transactions motive for holding/demanding money is related primarily to the fact that money serves as a store of value.

39. The asset (liquidity preference, or speculative) motive/demand for money relates primarily to money’s medium of exchange function.

40. A Keynesian would view expansionary monetary policy as having its impact primarily through its effect on interest rates and thus consumption.

Explanation / Answer

26. False

Explanation: Expansionary fiscal policy itself does not raise interest rate or income. It raises interest rate through crowding out effect i.e. when there are less funds for private borrowing because of higher government borrowing and the interest rate goes up. Also, income is increased when expansionary fiscal policy raises aggregate demand which stimulates the economy and results in higher supply.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.