National Income and Price Determination

The Interest Rate Effect refers to changes in government spending due to changes in interest rates.

Interest rates have no effect on firms' borrowing and investment decisions.

As interest rates rise, firms take out fewer loans and invest less in themselves. As interest rates fall, firms take out more loans and invest in themselves more.

As interest rates rise, firms take out more loans and invest more in themselves. As interest rates fall, firms take out fewer loans and invest less in themselves.

Government spending and net exports only.

Government spending and consumer spending only.

Consumer spending, investment spending, government spending, and net exports.

Consumer spending and investment spending only.

Reduction in investment spending

Increase in net exports

Decrease in government spending

Decline in consumer spending

Market demand represents the demand for goods and services by consumers only.

Market demand includes government spending, while aggregate demand does not.

Market demand shows the demand for one good/service at different prices, while aggregate demand shows the demand for all goods and services at different price levels.

Market demand measures production, while aggregate demand measures sales.

Increase in aggregate demand due to an increase in consumer spending.

Decrease in aggregate demand due to a decrease in consumer spending.

No effect on aggregate demand.

Movement along the curve: the amount of real GDP will decrease due to an increase in the price level (inflation).

Firms cut back on investment anticipating deflationary pressures on their profits.

Firms may increase investments due to reduced uncertainty about future price levels.

Companies invest more overseas fearing domestic currency depreciation.

Investment declines sharply because of expected increases in taxation policies.

It improves productivity and shifts long-term AS rightward.

INCORRECT.

Persistent target overshoots cause no significant macroeconomic consequences whatsoever.

Money supply contraction speeds up, causing hyperinflation emergencies suddenly.

Implausible rapid accelerations outstripping historical trends perpetuating cycles volatility instead of dampening them.

Public expectations would shift concerning inflation, undermining policy credibility.

Aggregate Demand Increases

Aggregate Demand Decreases

Unemployment Rates Are Guaranteed to Fall

Price Levels Invariably Rise

More attractive investment options overseas could cause capital outflows resulting in lower domestic currency valuations.

Consumer confidence would potentially improve as savings yield higher returns encouraging greater consumption spending.

Borrowing costs might increase leading to a slowdown in aggregate investment activity.

There could be no significant impact on aggregate demand as factors other than interest rates primarily influence economic activity.