Question

In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously. If we define money to include checking deposits, this legislation money demand. Which of the following is true if the Federal Reserve had maintained a constant money supply in the face of this change? Check all that apply. The interest rate would have increased. Aggregate output would have decreased. Aggregate demand would have remained unchanged. To have maintained a constant market interest rate (the interest rate on nonmonetary assets) in the face of this change, the Federal Reserve would have had to the money supply. If the Fed had maintained a constant market interest rate, aggregate demand and output would have .

Answer 1

Answer:

Explanation:

Aggregate output would have decreased.

The payment of interest on check deposits would have increased check deposits by bank customers.

This implies increase in saving, over consumption.

The reduction in consumption or demand for goods and services will in turn reduce aggregate output.

When saving increases over spending, lesser goods will be purchased and production will fall.

To have maintained a constant market interest rate in the face of this change, the Federal Reserve would have had to increase the money supply if not, interest rate on nonmonetary assets would fall.