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Economics multiple choice questions

A level

Money Supply (theory) Keynesian and Monetarist Schools The Demand for Money and Interest Rate Determination

Multiple Choice Questions and Answers

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 [N09/P3/QJ7]

➡Answer B

An increase in MS causes interest rate to fall and AD to rise, thus employment is likely to increase.

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. [N13/P3/Q19]

➡Answer B

Monetarists believe in controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself. In contrast, Keynesian economists believe that a troubled economy continues in a downward spiral unless an intervention drives consumers to buy more goods and services.

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 [N13/P3/Q21]

➡Answer C

A rise in investment increases the demand for funds that drives the rate of interest up. Option B will reduce it while A & D refer to liquidity preference.

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