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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Suppose a computer virus disables the nation’s automatic teller machines, making withdrawals from bank accounts less convenient. As a result, people want to keep more cash on hand, increasing the demand for money.

a. Assume the Fed does not change the money supply. According to the theory of liquidity preference, what happens to the interest rate? What happens to aggregate demand?

b. If instead the Fed wants to stabilize aggregate demand, how should it change the money supply?

c. If it wants to accomplish this change in the money supply using open-market operations, what should it do?

Subpart (a):

To determine

Increase in demand for money.

Explanation

Figure 1 illustrates the impact of increasing money supply on equilibrium position.

Figure 1 illustrates the impact on the interest rate due to less availability of ATMs. The horizontal axis in Figure 1 represents the quantity of money demanded and supplied and the vertical axis represents the interest rate. By the theory of liquidity preference, less availability of ATMs increases the demand for money...

Subpart (b):

To determine

Increase in demand for money.

Subpart (c):

To determine

Increase in demand for money.

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