Question

n 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 decreased. Aggregate output would have increased. Aggregate demand would have decreased.

Answer 1

Answer:

• Aggregate demand would have decreased

Explanation:

According to the traditional economic theory and the IS-LM model: As people will deposit more money to earn interest rate aggregate demand would have decreased .  Increase in money demand increases interest rate that decreases aggregate demand.