Aggregate Demand Questions

Indicate whether each of the following statements is true, false, or uncertain, and explain your answer. Your grade will depend primarily on the quality of your explanation. If a word or phrase is underlined, your answer must include a concise definition of the word or phrase. 

1. If money demand’s sensitivity to income increases, fiscal policy becomes weaker.

    

2. If investment’s sensitivity to the rate of interest decreases, monetary policy becomes stronger.

3. If the net exports variable does not depend on income and interest rates, monetary policy becomes stronger.

4. The higher the Marginal Propensity to Consume, the stronger fiscal policy would be.

5. Starting from a position of long-run equilibrium, if the demand for money increases, the economy will experience deflation before reaching long-run equilibrium.

6. If the economy is in a recessionary gap, and the price-adjustment mechanism has an expectation augmentation component, the economy will definitely overshot the full-employment level of output during the transition period.