EBK ECONOMICS
4th Edition
ISBN: 8220101443649
Author: KRUGMAN
Publisher: YUZU
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Question
Chapter 30, Problem 1BCQ
To determine
Concept Introduction:
Expert Solution & Answer
Explanation of Solution
- In the given case G, who can determine trends of financial
market very efficiently , heads P. After the investment of G, in bond market of the U.S it is predicted that the interest rate will decrease in near future. - When there is a rise in
unemployment , the inflation will fall and when there is a fall in unemployment, the inflation rate will rise. This is because the employment of people increases their ability to spend more which increases money supply in the economy which ultimately results in inflation. Therefore inflation and unemployment holds inverse relationship. - With a fall in inflation, it is predicted that the interest rate will fall to increase the liquid money. Therefore, according to the prediction, to increase the money supply in the economy the government will reduce the interest rate so that money demand can increase.
Conclusion:
Thus, to increase the money demand the interest rate will fall.
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