The Influence of Monetary and Fiscal Policy on Aggregate Demand: Algorithmic End

Question

The Influence of Monetary and Fiscal Policy on Aggregate Demand: Algorithmic End of Chapter Practice Assignment Read Chapter 21 Back to Assignment Due Sunday 12.10.17 at 11:4 Score: /2 Attempts: 3. Problems and Applications Q3 Suppose there is a rash of pickpocketing. As a result, people want to keep less cash on hand, decreasing the demand for money. Assume the Fed does not change the money supply. According to the theory of liquidity preference, the interest rate will which causes aggregate demand to if instead the Fed wants to stabilize aggregate demand, it should- _ the money supply by 9 Copyright NotiodTerms of Use Privacy NoticeSecurity Notice Accessibility

Explanation / Answer

The interest rate rises.

The aggregate demand rises.

should decrease money supply by selling bonds.

Reason

In the theory of liquidity preference, there is a tradeoff between money and interest rate. Thus, the demand rises as people will like to buy more asset using money and the government should decrease the supply to meet the demand.

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