Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 34, Problem 1QR
To determine
Liquidity preference theory and downward sloping of aggregate demand.
Expert Solution & Answer
Explanation of Solution
Keynes in his classic book “The General Theory of Employment, Interest, and Money”, proposed the theory of liquidity preference, according to which, the interest rate adjusts to bring money
According to the theory, the aggregate–demand curve slopes downward because
- (1) An increase in price level raises money demand.
- (2) Higher money demand causes the interest rate to rise.
- (3) A rise in interest rate reduces the quantity of goods and services demanded.
Thus, there exists an inverse relationship between the price level and aggregate demand, making the AD curve slopes downward.
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 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Explain the likely effects of a U.S. boom on the demand for Canadian exports. What would be the effect on Canadian aggregate demand? Suppose the Bank of Canada viewed its monetary policy as being appropriate for keeping GDP of Canada close to potential GDP. What would you then predict to be the Central Bank's response to the foreign boom in U.S.?arrow_forwardWhat are three factors that help explain the slope of the aggregate demand curve? What is the most important factor? Why?arrow_forwardExplain in words how investment multiplier and the interest sensitivity of aggregate demand affect the slope of the IS curve.arrow_forward
- Explain with example how a reduction in taxes without a reduction in government spending may have no impact on aggregate demand.arrow_forwardIf the economy’s labor force is increasing and also becoming more productive, what will happen to the aggregate supply curve?arrow_forwardWhich of the following are likely to increase investment and as a result, aggregate demand? A) falling real interest rates B) rising real interest rates C) increased business taxesarrow_forward
- Suppose that with the liquidity facilities and asset purchase programs, the Bank of Canada increased the money supply. How do you expect this to affect consumption and investment in equilibrium?arrow_forwardExplain fully why the aggregate demand curve has a negative slope.arrow_forwardExplain why the Federal Reserve is less likely to change interest rates following an increase in aggregate sunnly compared to an increase in aggregate demand.arrow_forward
- What effect will a successful supply-side policy have on the aggregate demand curve? A) Leftward shift B) Rightward shift C) Movement down along D) Movement up alongarrow_forwardExamine the following policies and determine which would decrease the level of aggregate demand. Decreasing in government spending and decreasing taxes Increasing investment and increasing government spending Increasing consumption and decreasing taxes Decreasing in government spending and increasing in taxesarrow_forwardHow did the large decrease in aggregate demand during the first and second quarters of 2020 (the Coronavirus demand shock) affect real GDP and the price level? Explain how and why the spread of the Coronavirus made an impact on consumer and business investment spending as well as overall aggregate demand? Be specific.arrow_forward
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