2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money market a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 18 Money Supply 15 Money Demand 12 Money Supply Money Demand 3 10 30 40 50 60 MONEY (Billions of dollars) than the quantity of After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be money supplied by the Fed at this interest rate. People will try to their money holdings. In order to do so, people will bonds and other interest-bearing assets, and bond issuers will find that they interest rates until the money market reaches its new equilibrium at an interest rate of INTEREST RATE (Percent) The following graph shows the economy's aggregate demand curve. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. 180 Aggregate Demand 150 120 90 60 Aggregate Demand 30 20 40 60 80 100 120 OUTPUT (Billions of dollars) The change in the interest rate that you found previously will cause residential and business investment spending to leading to in the quantity of output demanded in the economy. PRICE LEVEL
2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money market a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 18 Money Supply 15 Money Demand 12 Money Supply Money Demand 3 10 30 40 50 60 MONEY (Billions of dollars) than the quantity of After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be money supplied by the Fed at this interest rate. People will try to their money holdings. In order to do so, people will bonds and other interest-bearing assets, and bond issuers will find that they interest rates until the money market reaches its new equilibrium at an interest rate of INTEREST RATE (Percent) The following graph shows the economy's aggregate demand curve. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. 180 Aggregate Demand 150 120 90 60 Aggregate Demand 30 20 40 60 80 100 120 OUTPUT (Billions of dollars) The change in the interest rate that you found previously will cause residential and business investment spending to leading to in the quantity of output demanded in the economy. PRICE LEVEL
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:2. The theory of liquidity preference and the downward-slopingaggregate demand curve
The following graph shows the money market
a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes
the quantity of money supplied.
Suppose the price level decreases from 90 to 75.
Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money.
18
Money Supply
15
Money Demand
12
Money Supply
Money Demand
3
10
30
40
50
60
MONEY (Billions of dollars)
than the quantity of
After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be
money supplied by the Fed at this interest rate. People will try to
their money holdings. In order to do so, people will
bonds
and other interest-bearing assets, and bond issuers will find that they
interest rates until the money market reaches its
new equilibrium at an interest rate of
INTEREST RATE (Percent)
Transcribed Image Text:The following graph shows the economy's aggregate demand curve.
Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve.
180
Aggregate Demand
150
120
90
60
Aggregate Demand
30
20
40
60
80
100
120
OUTPUT (Billions of dollars)
The change in the interest rate that you found previously will cause residential and business investment spending to
leading to
in the quantity of output demanded in the economy.
PRICE LEVEL
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