Figure 34-2

question 181

Multiple Choice

Figure 34-2.On the left-hand graph,MS represents the supply of money and MD represents the demand for money;on the right-hand graph,AD represents aggregate demand.The usual quantities are measured along the axes of both graphs.

-Refer to Figure 34-2.If the money-supply curve MS on the left-hand graph were to shift to the right,this would

• A) represent an action taken by the Federal Reserve.
• B) shift the AD curve to the left.
• C) create,until the interest rate adjusted,an excess demand for money at the interest rate that equilibrated the money market before the shift.
• D) All of the above are correct.

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Definitions:

Substitution Effect

The change in demand for a good or service caused by a change in its price, making consumers choose alternatives.

Budget Constraints

The limitations on the spending behavior of consumers based on their income and the prices of goods and services, determining the possible combinations of goods and services they can afford.

Substitution Effect

The economic understanding that as prices rise or incomes decrease, consumers will replace more expensive items with less costly alternatives.

Income Effect

The variation in a person's or economy's earnings and the effect of this variation on the demanded quantity of a product or service.