Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country. if policymakers do nothing, what will happen to aggregate demand? what should the central bank do if it wants to stabilise aggregate demand? if the central bank does nothing, what might the parliament do to stabilise aggregate demand?
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The theory is, in essence, an application of supply and demand. According to Keynes, the interest rate adjusts to balance the supply of and demand for money.
How does the theory of liquidity preference help explain the downward slope of the aggregate-demand curve?
(1) A higher price level raises money demand. (2) Higher money demand leads to a higher interest rate. (3) A higher interest rate reduces the quantity of goods and services demanded. The result of this analysis is a negative relationship between the price level and the quantity of goods and services demanded
Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregate-demand curve.
When the Fed contracts the money supply, it raises the interest rate and reduces the quantity of goods and services demanded for any given price level, shifting the aggregate-demand curve to the left.
How does the theory of liquidity preference help explain the downward slope of the aggregate-demand curve?
(1) A higher price level raises money demand. (2) Higher money demand leads to a higher interest rate. (3) A higher interest rate reduces the quantity of goods and services demanded. The result of this analysis is a negative relationship between the price level and the quantity of goods and services demanded
Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregate-demand curve.
When the Fed contracts the money supply, it raises the interest rate and reduces the quantity of goods and services demanded for any given price level, shifting the aggregate-demand curve to the left.
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