-Refer to Exhibit 16

question 47

Multiple Choice

-Refer to Exhibit 16.7, which reflects the relationship between real GDP and the price level. If the economy is initially at point c and aggregate demand is stable, in the long run, the economy will _____

• A) move toward point a.
• B) move toward point b.
• C) stay at point c.
• D) move toward point d.
• E) move toward point f.

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Definitions:

Liquidity Preference Theory

A theory ofthe shape of the yield curve. The curveslopes upward because, all other thing equal, investors prefer shorter, moreliquid investments. They must therefore be induced to lend longer withhigher rates

Market Segmentation Theory

A theory of the shape of the yield curve. The debt market is segmented by term, and each segment is independent of the others. Hence, the curve slopes up or down depending on supply and demand conditions in the various market segments.

Liquidity Preference Theory

A theory suggesting that people prefer to hold their wealth in liquid form for convenience and as a precaution against uncertainty, affecting interest rates.

Yield Curve

A graphical representation of interest rates on debt for a range of maturities, often used as an indicator of economic expectations and interest rate trends.