When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:
a. interest-rate effect.
b. real balance effect.
c. investment effect.
d. disinvestment effect.
QUESTION 2National income is calculated as GDP:
a. plus depreciation.
b. plus exports.
c. minus imports.
d. minus depreciation.
QUESTION 3Which of the following correctly describes the interest-rate effect?
a. If the price level decreases, consumer purchasing power decreases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
b. If the price level decreases, consumer purchasing power increases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
c. If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
d. If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates fall, debt-financed borrowing increases, and real GDP demanded increases.
QUESTION 4National income (NI) is calculated by adjusting GDP for:
a. depreciation.
b. investment and net exports.
c. Social Security insurance contributions and transfer payments.
d. corporate and personal income taxes.
QUESTION 5Suppose the price level falls. The result is that the:
a. aggregate supply curve would shift to the right.
b. aggregate supply curve would shift to the left.
c. general price level would rise causing a movement up the aggregate demand curve.
d. aggregate demand curve would slope downward because of the real balances effect.
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