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 logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve? Provide an example?
Explain the liquidity trap. Do you think that the theory accurately describes the events after the Great recession
Discuss the theory of liquidity preference in relation to aggregate-demand? Draw a graph of the equilibrium in the money market to demonstrate your answer
Chapter 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- 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?arrow_forwardClassify 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 increasearrow_forwardIf the Federal Reserve wanted use an open market operation to combat a recession, what would they do, and what would its effect be? The Federal Reserve expands the money supply by 5%. Draw an aggregate supply/aggregate demand diagram to show the short run effect of this scenario. What happens to price and output? Which curve shifts? Which component of that curve accounts for the shift?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_forwardUsing the supply of money diagram (s), explain and demonstrate diagrammatically what happens to the interest rate, consumption, investment and aggregate demand, if the Central Bank sells government bonds to the public.arrow_forwardHow would the expansionary monetary policy by the Fed of lowering interest rates affect the four components of aggregate demand? You must state and explain whether the policy has resulted in ‘increase’, ‘decrease’ or ‘no effect’ on each of these components.arrow_forward
- Suppose 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_forwardUse 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_forward
- Explanation it correctly and detailsarrow_forwardUnder what circumstances does a liquidity trap arise and why does it lead to a failure in the above mechanisms?arrow_forwardIf the economy is able to self-correct from a negative GDP gap, why might the Fed wish to intervene in the market?arrow_forward
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