Which of the Following Situations Illustrates How Monetary Policy Can

question 57

Multiple Choice

Which of the following situations illustrates how monetary policy can influence aggregate demand?

• A)The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a result, aggregate demand decreases.
• B)Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As a result, aggregate demand decreases.
• C)The government reduces the goods and services tax. As a result, consumption expenditure increases and aggregate demand increases.
• D)The exchange rate value of the Canadian dollar rises. As a result, people living near the U.S.-Canada border increase their imports of goods and net exports decrease.
• E)The government increases its expenditures. The demand for loanable funds increases, which raises the real interest rate. Investment increases.

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Definitions:

Availability Heuristic

A fast-track cognitive process that uses the earliest examples coming to mind for a person when evaluating a unique topic, concept, practice, or choice.

Gambler's Fallacy

The inaccurate belief that when something is happening more frequently than is typical during a particular time, it will subsequently happen less frequently, or the other way around.

Maladaptiveness

A trait or behavior that is counterproductive to an individual's well-being or ability to meet demands of the environment.

Incompetence

The lack of ability, qualification, or capacity to perform a specified job or task effectively.