MCQ Questions and Answers:

34. Question: According to monetarist theory, what will be the short-run effect of an unexpected increase in the money supply?

A) An appreciation of the foreign exchange rate
B) An increase in employment
C) An increase in real wages
D) An increase in the rate of interest

Answer: B

Explanation: According to monetarist theory, an unexpected increase in the money supply will cause interest rates to fall, leading to an increase in aggregate demand and, consequently, an increase in employment.

35. Question: Which assertion could be described as monetarist rather than Keynesian?

A) The interest elasticity of investment expenditure is close to zero.
B) The money supply is the main determinant of aggregate monetary expenditure.
C) The money supply is the main determinant of output in the long run.
D) The velocity of circulation of money is unstable over time.

Answer: B

Explanation: Assertion B, "The money supply is the main determinant of aggregate monetary expenditure," is more in line with monetarist theory. Monetarists emphasize the control of the money supply as a key factor in influencing economic activity. Keynesians, on the other hand, place more emphasis on fiscal policy and government intervention in managing the economy.

36. Question: According to loanable funds theory, what will cause the rate of interest to rise?

A) A decrease in the demand for money
B) An increase in the level of savings
C) An increase in the rate of investment
D) An increase in the supply of money

Answer: C

Explanation: According to loanable funds theory, an increase in the rate of investment will cause the demand for funds to rise, leading to an increase in the rate of interest. Option B (increase in savings) would have the opposite effect and decrease the interest rate, while options A and D are not directly related to loanable funds theory.