2. The theory of liquidity preference and the downward-sloping aggregate-demand curve The following graph shows the money market in a hypothetical economy. Assume that the central bank fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 12 Money Supply 10 Money Demand INTEREST RATE (Percent) Money Supply 6 Money Demand 2 0 10 20 30 40 50 60 MONEY (Billions of dollars)After the decrease in the price level, the quantity of money demanded at the initial interest rate of 5% Will be money supplied by the central bank at this interest rate. People will try to 7 bonds and other interestrbean'ng assets, and bond issuers will nd that they reaches its new equilibrium at an interest rate of . The following graph shows the economy's aggregatedemand curve. 7 than the quantity of v their money holdings. In order to do so, people will V interest rates until the money market have to offer higher can offer lower Show the impact of the decrease in the price level by moving the paint along the curve or shifting the curve. 180 150 120 9|) PRICE IJEVEL 6|) Aggregate Demand 3|] 20 4:: on so OUTPUT {Billions of dollars) me 120 C?) _0_ Aggregate Demand Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. 180 O 150 Aggregate Demand O 120 PRICE LEVEL 60 Aggregate Demand 30 20 40 60 80 100 120 OUTPUT (Billions of dollars) 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