ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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a reduction in government spending
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a reduction in the rate of interest
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a rise in a budget surplus
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a rise in income tax
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Detailed explanation-1: -An increase in the interest rate reduces the quantity of money demanded. A reduction in the interest rate increases the quantity of money demanded.
Detailed explanation-2: -The economic factors that most affect the demand for consumer goods are employment, wages, prices/inflation, interest rates, and consumer confidence.
Detailed explanation-3: -When interest rates rise, it becomes more “expensive” to borrow money. That borrowed money would typically go toward consumer expenditures and capital investment, and so these two sectors diminish under higher interest rates. Therefore aggregate demand decreases, per the equation.
Detailed explanation-4: -Aggregate demand increases with increase in investment.
Detailed explanation-5: -Interest rates are typically determined by the supply of and demand for money in the economy. If at any given interest rate, the demand for funds is higher than supply of funds, interest rates tend to rise and vice versa.