Reference no: EM133843475
Questions:
1. What is the theory of liquidity preference? How does it help explain the downward slope of the aggregatedemand curve?
2. Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregatedemand curve.
3. The government spends $3 billion to buy police cars. Explain why aggregate demand might increase by more or less than $3 billion.
4. 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 Fed do if it wants to stabilize aggregate demand? If the Fed does nothing, what might Congress do to stabilize aggregate demand? Explain your reasoning.
Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. Use diagrams to illustrate your answers.
a. The Fed's bond traders buy bonds in open-market operations.
b. An increase in credit-card availability reduces the amount of cash people want to hold.
c. The Fed reduces reserve requirements.
d. Households decide to hold more money to use for holiday shopping.
e. A wave of optimism boosts business investment and expands aggregate demand.