《西方经济学》习题答案—Chapter 34.docVIP

SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. A decrease in the money supply increases the equilibrium interest rate. The decrease in the money supply reduces aggregate demand because the higher interest rate causes households to buy fewer houses, reducing the demand for residential investment, and causes firms to spend less on new factories and new equipment, reducing business investment. 2. If the government reduces spending on highway construction by $10 billion, the aggregate-demand curve shifts to the left because government purchases are lower. The shift to the left of the aggregate-demand curve could be more than $10 billion because of the multiplier effect or it could be less than $10 billion because of the crowding-out effect. 3. If people become pessimistic about the future, they will spend less, causing the aggregate-demand curve to shift to the left. If the Fed wants to stabilize aggregate demand, it should increase the money supply. The increase in the money supply will cause the interest rate to decline, thus stimulating residential and business investment. The Fed might choose not to do this because by the time the policy action takes effect, the long lag time might mean the economy would have recovered on its own, and the increase in the money supply will cause inflation. Questions for Review 1. The theory of liquidity preference is Keyness theory of how the interest rate is determined. According to the theory, the aggregate-demand curve slopes downward because: (1) a higher price level raises money demand; (2) higher money demand leads to a higher interest rate; and (3) a higher interest rate reduces the quantity of goods and services demanded. Thus the price level has a negative relationship with the quantity of goods and services demanded. 2. A decrease in the money supply shifts the money-supply curve to the left. The money-supply curve now intersects the money-demand curve at a higher interest rate. The higher interest ra