Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781305971509
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 21, Problem 1CQQ
To determine
Relation between money supply and aggregate demand.
Expert Solution & Answer
Answer to Problem 1CQQ
Option ‘b’ is correct.
Explanation of Solution
Option (b):
By the theory of liquidity preference, an increase in the money supply shifts the money supply curve to the right causing the equilibrium interest rate to decrease. This stimulates consumption and investment, thereby expanding aggregate demand. Thus, option ‘b’ is correct.
Option (a):
Increase in money supply shifts the money supply curve to the right, which lowers the interest rate. Thus, option ‘a’ is incorrect.
Option (c):
By the theory of liquidity preference, a decrease in money supply shifts the money supply curve to the left causing the equilibrium interest rate to increase. This reduces consumption and investment, thereby contracting aggregate demand. Thus, option ‘c’ is incorrect.
Option (d):
Decrease in money supply shifts the money supply curve to the left, which increases the interest rate. Thus, option ‘d’ is incorrect.
Economics Concept Introduction
Concept introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period.
Money supply: Money supply refers to the total amount of monetary assets circulating in an economy during a particular period.
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Chapter 21 Solutions
Principles of Macroeconomics (MindTap Course List)
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