Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 16, Problem 1QR
To determine
Liquidity preference theory and downward sloping of aggregate demand.
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What is the Theory of Liquidity Preference? How does it help explain the downward
slope of the aggregate-demand curve?
Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve? Provide an example?
Discuss the theory of liquidity preference in relation to aggregate-demand? Draw a graph of the equilibrium in the money market to demonstrate your answer
Chapter 16 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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- Explain and show graphically how the change in interest rates affects aggregate demand. Answer this question as it pertains to an open market SALEarrow_forwardUnder what circumstances does a liquidity trap arise and why does it lead to a failure in the above mechanisms?arrow_forwardis one of the reasons aggregate demand decreases when interest rates increases is because people earn more money by keeping it in the bank?arrow_forward
- Suppose that government spending is increased at the same time when an autonomous monetary policy tightening occurs. What will happen to the position of the aggregate demand curve?arrow_forwardAccording to the Theory of Liquidity Preference, a fall in the price level reduces the amount of money that people wish to holdAs a result, falling interest rates stimulates investment spending and aggregate demand. Give an example of this and explainarrow_forwardCan CDOs create a liquidity squeeze in the financial markets ?arrow_forward
- Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encountered.arrow_forwardExplain in words what you understand by the liquidity trap.arrow_forwardAn increase in households’ desired money holding causes an increase in interest rates. How does this affect investment spending and aggregate demand?arrow_forward
- The last personal savings rate recorded by the Federal Reserve database was 2.4%. Assume your average tax rate is 35%. The Federal Government recently spent $1.2T on “infrastructure”. Assuming this stands, answer the following question. 1. How much disposable income would the third iteration of this spending generate? 1.1A. What is the estimated increase in aggregate demand as a result of this bill assuming no tax increase?arrow_forwardUnexpectedly, the US government announced that it would be drastically reducing government spending in the coming months. How will this affect aggregate demand and interest rates? a. Aggregate demand will shift right; interest rates will rise b. Aggregate demand will shift right; interest rates will fall c. Aggregate demand will shift left; interest rates will rise d. Aggregate demand will shift left; interest rates will fallarrow_forwardWhat is meant by Liquidity Trap? Which policy is more effective in liquidity trap and why? Discuss its implications. Kindly answer this question as soon asarrow_forward
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