Question

3. The theory of liquidity preference and the downward-sloping aggregate demand curve

The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 150 to 100. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level.

Tool tip: Click and drag the appropriate curve. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther.

The lower price level shifts the money quantity of money demanded at the initial interest rate of 3% will be Fed. People will try to interest-bearing assets, and bond issuers will find that they reaches its new equilibrium at an interest rate of curve to the . After the decrease in the price level, the than the quantity of money supplied by the their money holdings. In order to do so, people will bonds and other interest rates until the money market

The change in the interest rate that you found previously will cause residential and business investment spending to leading to in the quantity of output demanded in the economy. The following graph shows the economy's aggregate demand curve. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve.

 Tool tip: Click and drag either the curve or the dot, whichever applies. Either element will snap into position, so if you try to move it and it snaps back to its original position, just try again and drag it a little farther. 

Answer 1