Question

Economic investment refers to _____.

1. buying a financial asset for a gain.
2. selling a financial asset for a gain.
3. postponing purchases of goods and services.
4. making new additions to a firm’s stock of capital.

Changes in interest rates, all else held constant, cause a shift in _____.

1. either the investment demand curve or the aggregate demand curve
2. the investment demand curve, but not the aggregate demand curve
3. the aggregate demand curve, but not the investment demand curve
4. the investment demand curve and the aggregate demand curve

The purpose of expansionary monetary policy is to increase _____.

1. the GDP gap
2. the inflation rate
3. real GDP
4. interest rates

Which of the following best describes the cause-and-effect chain of an expansionary monetary policy?

1. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
2. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
3. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
4. An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

Answer 1

1. Option D. making new additions to a firm’s stock of capital.

Explanation: Economic investment means increasing production capacity by increasing capital stock.

2. Option D

Explanation: Change in the interest rates result in a change in both aggregate demand as well as investment demand.

3. Option C

Explanation: Expansionary monetary policy is undertaken to stimulate real GDP by increasing the money supply and economic activities.

4. Option D

Explanation: When the money supply increases, the interest rate falls which results in higher investment spending and aggregate demand. Ultimately, the real GDP increases.