Question

1.Which of the following is probably the most sensitive to changes in real interest rates?

Select one:

a. Government purchases

b. Exports

c. Consumption

d. Imports

e. Investment

2.When interest rates increase,

Select one:

a. government purchases will increase to offset the decline in consumption, investment, and net exports.

b. expenditures may increase or decrease.

c. investment will increase.

d. expenditures increase.

e. expenditures decrease.

3.If real GDP is greater than potential GDP,

Select one:

a. the rate of inflation will not change.

b. the price level will not change.

c. the rate of inflation will decrease.

d. the price level will fall.

e. the rate of inflation will increase.

Answer 1

Answer 1- The most sensitive to changes in real interest rates is Investment as it is inversely related to interest rates i.e as interest rate increses, investment decreses and as interest rates increases, investment increases.

So, option e) is correct.

Answer 2- As interest rates increases, Expenditures decrease because aggregate expenditure is the addition of comsumption, investment, government expenditure and net exports. So, interest rate is inversely linked to investment i.e, as interest rate increases investment decreases and hence aggregate expenditure will decrease.

So, option e) is correct

Answer 3- If real GDP is greater than potential GDP then the rate of inflation will increase because increase in real GDP causes economy to increase its consumption which leads to increase in the prices in long run.

So, option e) is correct.