Which of the Following Statements Is True

question 166

Multiple Choice

Which of the following statements is true?

• A) Increases in the interest rate crowd out both consumption and investment spending, and this reduces the size of the multiplier.
• B) Increases in the interest rate crowd out both consumption and investment spending, and this increases the size of the multiplier.
• C) Increases in the interest rate have no effect on the size of the multiplier because higher interest rates cause consumption to increase, which offsets the crowding out of investment.
• D) Increases in the interest rate cause the size of the multiplier to be smaller if the economy is on the flat portion of the AS curve and to be larger if the economy is on the steep portion of the AS curve.

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Definitions:

Market Efficiency

A concept in financial economics that suggests that asset prices fully reflect all available information.

Well-Organized Markets

Financial markets characterized by high levels of efficiency, transparency, liquidity, and regulation, facilitating fair and orderly trading and pricing of securities.

Efficient Markets

A hypothesis suggesting that financial markets are "informationally efficient," meaning prices of securities reflect all available information at any moment.

Expected Risk Premium

The extra return investors require to hold a risky asset over a risk-free asset, reflecting the additional risk.