Which of the following properly describes the interest-rate effect of aggregate demand?
a. A higher price level leads to higher money demand, higher money demand leads to higher interest rates, a higher interest rate increases the quantity of goods and services demanded.
b. A higher price level leads to higher money demand, higher money demand leads to lower interest rates, a higher interest rate reduces the quantity of goods and services demanded.
c. A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate reduces the quantity of goods and services demanded.
d. A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate increases the quantity of goods and services demanded.
D
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Fill in the blank(s) with the appropriate word(s).
If the Fed decreases the monetary base by $100 million and the money multiplier is 4, M1 will
A) rise by $400 million. B) fall by $400 million. C) rise by $25 million. D) fall by $25 million.