6 5 points Based on our understanding of the model presented

6. [5 points] Based on our understanding of the model presented in Chapter 3, a reduction in investment will cause? A) an increase in the multiplier. B) a reduction in the multiplier C) a reduction in the marginal propensity to save D) a reduction in output. E) both B and D 7. [5 points] An open market sale of securities will tend to cause A) a reduction in the supply of central bank money. B) a reduction in the demand for currency. C) a reduction in the demand for reserves. D) none of the above 8. 5 points Suppose there is an increase in consumer confidence. Which of the following represents the complete list of variables that must increase in response to this increase in consumer confidence? A) consumption B) consumption and investment C) consumption, investment and output D) consumption and output E) consumption, output and the interest rate

Solution

6)

Reduction in investment implies that now there would be less economic activities. Less economic activities would cause less output.

Thus, right answer is (D).

Value of multiplier depends on marginal propensity to consume (MPC).

7)

Right answer is (A)

Sale of securities will mop up money from market thereby causing fall in money supply.

8)

Right answer is ( C)