TRUE/FALSE

1.Both monetary policy and fiscal policy affect aggregate demand.

2.For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

3.According to the theory of liquidity preference, the interest rate adjusts to balance the supply of, and demand for, loanable funds.

4.The theory of liquidity preference was developed by Irving Fisher.

5.An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

6.Other things the same, an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

7.In liquidity preference theory, an increase in the interest rate, other things the same, decreases the quantity of money demanded, but does not shift the money demand curve.

8.An increase in the price level shifts the money demand curve to the left, causing interest rates to increase.

9.An increase in the money supply shifts the aggregate-supply curve to the right.

10.When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

11.Stock prices often rise when the Fed raises interest rates.

12.When the Fed announces a target for the federal funds rate, it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

MULTIPLE CHOICE

1.The interest-rate effect

a.depends on the idea that increases in interest rates increase the quantity of money demanded.

b.depends on the idea that increases in interest rates increase the quantity of money supplied.

c.is the most important reason, in the case of the United States, for the downward