Name-Tanay Surana Econ 2301.00104/29/2016QUIZ 5 ANSWERSA1) Aggregate output will increase, the demand for money increases which places pressure on the interest rate to rise. This in turn causes planned investment to decline and causes aggregate output to decrease, offsetting some of the initial increase in output.A2) MsrI YMdwhich causes r to decrease less than if Md didnot increase.A3) Aggregate quantity-demanded falls when the price level increases because the higher price level causes the demand for money to rise. With the money supply constant, the interest rate will rise to reestablish equilibrium in the money market. It is the higher interest rate that causes aggregate output to fall.A4) Other things equal, consumption expenditures tend to rise when the interest rate falls and to fall when the interest rate rises. For example, an increase in the price level increases the demand for money, which leads to an increase in the interest rate, which leads to a decrease in consumption, which leads to a decrease in aggregate output.A5) In deriving a simple demand curve we assume that the price of all other goods and income are held constant. Neither of these assumptions hold true for an aggregate demand curve. When the overall price level rises for instance, many
