15 tests based on Chapter 10

15 TESTS based on Chapter 10
1. What is the name of the theory proposed by Keynes in The General Theory to explain how interest rates are determined?
a) Theory of Monetary Supply
b) Keynesian Theory of Liquidity Preference.
c) Theory of Banking Assets
d) None of the above

2. What is the most liquid asset in the economy, according to the Theory of Liquidity Preference?

a) Bank deposits
b) Coins & Currency
c) Bonds
d) Money.

3. According to the Theory of Liquidity Preference, what is the assumption about the supply of real money balances?

a) It varies with interest rate changes
b) It is unlimited
c) It is fixed and does not depend on the interest rate.
d) It is unknown

4. What is an exogenous variable in the Theory of Liquidity Preference?

a) The demand for money
b) The supply of money (M).
c) Both a and b
d) None of the above

5. What is the opportunity cost of holding money, according to the Theory of Liquidity Preference?

a) The interest rate.
b) The inflation rate
c) The fiscal policy of the government
d) None of the above

6. When the interest rate rises, what happens to the demand for money, according to the Theory of Liquidity Preference?

a) It increases
b) It decreases.
c) It remains constant
d) It has no effect

7. What is the main idea behind the theory of liquidity preference?

a) It explains how income affects money demand
b) It explains how the interest rate is determined.
c) It explains how consumption patterns change with income
d) It explains the index of demand for product

8. How is the quantity of real money balances demanded related to the interest rate and income?

a) Positive relationship with interest rate and negative relationship with income.
b) Positive relationship with both interest rate and income
c) Negative relationship with both interest rate and income
d) Negative relationship with only interest rate

9. What happens to the equilibrium interest rate when the level of income changes according to the theory of liquidity preference?

a) The interest rate remains unchanged
b) The interest rate decreases
c) The interest rate increases.
d) The interest rate fluctuate

10. What does the LM curve represent?

a) The level of income that equilibrates the money market at any interest rate
b) The interest rate that equilibrates the money market at any level of income.
c) The relationship between supply and demand for real money balances
d) It represents how to calculate interest rate

11. What factor(s) does the equilibrium interest rate depend on?

a) Only the supply of real money balances
b) Only the level of income
c) Both the supply of real money balances and the level of income.
d) ) Only the level of demand

12. How does a decrease in the supply of real money balances affect the LM curve?

a) It shifts the LM curve up.
b) It shifts the LM curve down
c) It has no effect on the LM curve
d) It changes the LM curve down

13. Why does a decrease in the supply of real money balances raise the interest rate according to the theory of liquidity preference?

a) Because people want to hold more money when the supply decreases, leading to an increase in demand for money and thus a higher interest rate.
b) Because people want to hold less money when the supply decreases, leading to a decrease in demand for money and thus a higher interest rate
c) Because a decrease in the money supply raises income, leading to an increase in demand for money and thus a higher interest rate
d) Because a decrease in the money supply raises income, leading to an increase in income for money and thus a higher interest rate

14. What does the LM curve show when considering a change in the supply of real money balances?

a) The new equilibrium level of income
b) The new equilibrium interest rate.
c) The new equilibrium level of unemployment
d) The new equilibrium level of employment

15. What is the intersection of the IS and LM curves used to determine in the IS-LM model?

a) The equilibrium level of employment
b) The equilibrium interest rate and income.
c) The equilibrium price level
d) The equilibrium level of unemployment