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.

Expert Solution

1.

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.

2.

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 2 years ago

4) Using the liquidity preference model, graphically illustrate: a) an initial increase in the money supply...

4) Using the liquidity preference model, graphically illustrate: a) an initial increase in the money supply b) a longer-term increase in income (GDP) and the price level (inflation).

Use the liquidity preference model to show how an increase in money supply (M) shift the...

Use the liquidity preference model to show how an increase in money supply (M) shift the LM curve. (Draw two diagrams: the market for real money balances and the LM curve) Thanks!

According to liquidity preference theory,a. an increase in the price level reduces the quantity of money...

According to liquidity preference theory,a. an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward.b. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.c. an increase in the interest rate increases the quantity...

According to the theory of liquidity preference, the opportunity cost of holding money rises when the...

According to the theory of liquidity preference, the opportunity cost of holding money rises when the interest rate rises, so people desire to hold more of it. Select one: True False In the long run, changes in government spending can affect prices, output, and unemployment rates if the spending programs alter the availability of natural resources, capital equipment or technology Select one: True False According to liquidity preference theory, the money supply curve is vertical because the Fed can dictate...

According to liquidity preference theory, a decrease in money demand for some reason other than a...

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes A. the interest rate to fall, so aggregate demand shifts right. B. the interest rate to fall, so aggregate demand shifts left. C. the interest rate to rise, so aggregate demand shifts right. D. the interest rate to rise, so aggregate demand shifts left.

Outline the steps between an increase in the money supply and an increase in equilibrium output

According to the quantity theory of money, an increase in the money supply only raises the...

According to the quantity theory of money, an increase in the money supply only raises the price level in the long run. This is because A. the long-run aggregate supply is unaffected by the money supply, while the aggregate demand increases when the money supply increases. B. the long-run aggregate supply is lower when the money supply increases, while the aggregate demand is unaffected by the money supply. C. the short-run aggregate supply and the aggregate demand both increase. D....

Explain the Keynes’s Liquidity Preference Theory of money demand

what would be the effects of an increase in the money supply according to the classical...

what would be the effects of an increase in the money supply according to the classical theory of money and the monetarist theory of money?

According to the long run money market model, if money supply is growing at 4% in...

According to the long run money market model, if money supply is growing at 4% in the United States and 5% in the United Kingdom, while real GDP is rising at 2% in the United States, and at 1% in the United Kingdom, what will happen to the nominal exchange rate between USD and British pound? What is the rate of expected depreciation?

Question