According to the liquidity preference model: A. an increase in the money supply lowers the equilibrium...

According to the liquidity preference model:

	A.	an increase in the money supply lowers the equilibrium rate of interest.
	B.	the demand for money curve is a vertical line.
	C.	the money supply curve is a horizontal line.
	D.	a decrease in the money supply lowers the equilibrium rate of interest.

A price floor or a price ceiling is an example of:

A.
market equilibrium price.

B.
a quota.

C.
a price control.

D.
a quantity control.

Solutions

Expert Solution

Liquidity can be defined as the amount of money that is easily available for investment and spending. For example cash, Treasury bills, notes, and bonds, and any other asset which can be sold quickly.

Hence according to the liquidity preference theory at very low interest rate, people prefer to hold money in the form of cash rather than keeping in the bank or in bond.

This is because the opportunity cost of holding money is lower at low interest rate.

Hence it can be said that according to the liquidity preference model an increase in the money supply lowers the equilibrium rate of interest.

Hence option A is the correct answer.

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

So when the price floor is set above the equilibrium price, only then it is effective but when it is set either below the equilibrium price or at the equilibrium price, then it will be ineffective. So there will be no unintended inventory and market gets cleared.Hence it can be said that government intervention of setting price controls impacts the market equilibrium.

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs.

So when the price floor is set above the equilibrium price, only then it is effective but when it is set either below the equilibrium price or at the equilibrium price, then it will be ineffective. So there will be no unintended inventory and market gets cleared.Since price floor and price ceiling both controls the price. Hence these are an example of a price control.

Hence option c is the correct answer.

Rahul Sunny answered 1 year ago

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Subjects

	A.	market equilibrium price.
	B.	a quota.
	C.	a price control.
	D.	a quantity control.