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ECS3701 Assignment 01 Semester 1 2023 Detailed Solutions
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Monetary EconomicsECS3701
ASSIGNMENT 01 SEMESTER 01 2023
ASSIGNMENT 01 (compulsory)
20 MULTIPLE-CHOICE QUESTIONS
DUE DATE: 27 March 2023
UNIQUE NUMBER: 766123
QUESTION 1
A business cycle:
a. is the upward movement of the aggregate output in an economy.
b. is the upward and downward movement of the aggregate output in an economy.
c. involves borrowing from investors and lending to savers.
d. has no effect on economic performance.
The correct answer is (b)
Business cycles, the upward and downward movement of aggregate output (the total
production of goods and services), produced in the economy. When output is raising
unemployment decreases, when output is falling, unemployment increases.
Recessions are periods of declining aggregate output we see that the rate of money growth
has declined before almost every recession indicating that changes in money might be the
driving force behind business cycle fluctuations but not every decline in money growth is
followed by a recession.
, QUESTION 2
As the interest rate on bonds increases, the opportunity cost of _______ rises, money is
_______ and the quantity of money demanded _______.
a. holding bonds, more desirable, falls.
b. holding money, less desirable, increases.
c. holding money, less desirable, falls.
d. holding money, more desirable, falls.
The correct answer is (c) holding money, less desirable, falls.
The demand for money and the interest rate should be negatively related using the concept
of opportunity cost, the amount of interest (expected return) sacrificed by not holding the
alternative asset- the bonds. As the interest rate on bonds, i, rises, the opportunity cost of
holding money rises, and so money is less desirable, and the quantity of money demanded
fall.
QUESTION 3
Everything else held constant, a decrease in interest rates will cause consumer
spending on housing to ...
a. rise.
b. either rise or fall.
c. fall.
d. remain unchanged.
The correct answer is (a) rise.
A decrease in interest rates will make it cheaper for consumers to borrow money for a
mortgage to purchase a home. This makes housing more affordable for consumers, leading
to an increase in consumer spending on housing.
Lower interest rates can also make it more attractive for consumers to refinance their existing
mortgages, which can free up more disposable income to spend on housing or other goods
and services.
Therefore, all else being held constant, a decrease in interest rates will cause consumer
spending on housing to rise.
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