Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 34, Problem 2QR
To determine
Liquidity preference theory and aggregate demand.
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Explain the liquidity trap. Do you think that the theory accurately describes the events after the Great recession
An 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?
Classify 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 increase
Chapter 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- is one of the reasons aggregate demand decreases when interest rates increases is because people earn more money by keeping it in the bank?arrow_forwardSuppose 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_forwardSuppose 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_forward
- Which is NOT one of the three main tools used by the Fed to influence aggregate demand? distributing currency open market operations changes in the interest rate paid on reserves lending to banks and other financial institutionsarrow_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_forwardSuppose government spending increases. Would the effect on aggregate demand be larger if the central bank held the money supply constant in response or if the central bank chose to maintain a fixed interest rate? Illustrate and explainarrow_forward
- Use the money market to explain the interest-rate effect and it's relation to the slope of the aggregate demand curve.arrow_forwardExplain and show graphically how the change in interest rates affects aggregate demand. Answer this question as it pertains to an open market SALEarrow_forwardExplanation it correctly and detailsarrow_forward
- Please answer everything in the photos including the graph.arrow_forwardChanges to both the money supply and the velocity of money include changes in aggregate demand. However, the long-run impacts of changes in these variables are different. How are the effects of an increase in the velocity of money and the effects of an increase in the money supply different?arrow_forwardWhat happens to the money supply when the Fed buys government bonds? According to the theory of liquidity preference, what is the impact of the Fed action on the equilibrium interest rate?arrow_forward
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