Essentials Of Economics, Loose-leaf Version
8th Edition
ISBN: 9781337096898
Author: N. Gregory Mankiw
Publisher: South-Western College Pub
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Chapter 24, Problem 2QR
To determine
Liquidity preference theory and aggregate demand.
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Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve? Provide an example?
Explain the liquidity trap. Do you think that the theory accurately describes the events after the Great recession
What is the Theory of Liquidity Preference? How does it help explain the downward
slope of the aggregate-demand curve?
Chapter 24 Solutions
Essentials Of Economics, Loose-leaf Version
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- Discuss the theory of liquidity preference in relation to aggregate-demand? Draw a graph of the equilibrium in the money market to demonstrate your answerarrow_forwardSuppose 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_forwardAn increase in the interest rate discourages private firms from making new investments in factories. How does the sensitivity of investment to changes in the interest rate affect the amount by which monetary policy influences aggregate-demand?arrow_forward
- What is the theory of liquidity preference? How does it help explain the downward slope of the curve? aggregate-demandarrow_forwardClassify each description according to whether or not it can cause aggregate demand to increase. Answer the bank in the images below. Can cause aggregate demand to increase Will not cause aggregate demand to increasearrow_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 a wave of negative “ animal spirits” overruns the economy, and people become pessimistic about the future.What happens to aggregate demand? If the Fed wants to stabilize aggregate demand, how should it alter the money supply? If it does this, what happens to the interest rate? Why might the Fed choose not to respond in this way?arrow_forwardIf the Federal Reserve wanted use an open market operation to combat a recession, what would they do, and what would its effect be? The Federal Reserve expands the money supply by 5%. Draw an aggregate supply/aggregate demand diagram to show the short run effect of this scenario. What happens to price and output? Which curve shifts? Which component of that curve accounts for the shift?arrow_forwardIn one or two sentences, explain why Keynesian economists believe that increasing the money supply will be effective at increasing aggregate demand in the short run.arrow_forward
- Suppose government spending increases. Would the effect on aggregate demand be larger if the Federal Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed interest rate? Explain.arrow_forwardExplain how the central banks are able to reduce the level of aggregate demand in an economy by changing the reserve requirements of commercial banks?arrow_forwardSuppose 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. Assume the Fed does not change the money supply. According to the theory of liquidity preference, the interest rate will , which causes aggregate demand to . If instead the Fed wants to stabilize aggregate demand, it should the money supply by government bonds.arrow_forward
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