The Federal Reserve decreases the money supply by 5 percent. Use the theory of liquidity preference to illustrate the impact of
this policy on the interest rate on the following graph Money Supply Money Demand Money Supply Money Demand Quantity of Money Use the model of aggregate demand and aggregate supply to illustrate the impact of this change in the interest rate on output and the price level in the short run. LRAS Aggregate Supply Aggregate Demand Aggregate Supply LRAS Aggregate Demand Quantity of Output Which of the following will happen when the economy makes the transition from its short-run equilibrium to its long-run equilibrium? a) The price level will fall. b)The demand for money will fall.c) The equilibrium interest rate will rise.
1 answer:
Answer:
1 and 2: Find attached of the graph
3. The correct answers are:
(a) Price level will fall.
b)The demand for money will fall
Explanation:
(1) A fall in money supply will shift the money supply curve leftward, increasing interest rate and quantity of money. See the first attachment for the graph.
(2) Lower money supply will decrease aggregate demand, shifting AD curve leftward, decreasing both price level and output. See the second attachment for the graph.
(3) The following will happen during transition:
- --(a) Price level will fall.
-- b)The demand for money will fall
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