Question
Use a Liquidity Preference Theory to predict how each of the following shocks would affect interest rates in the short run, all else equal. In
Use a Liquidity Preference Theory to predict how each of the following shocks would affect interest rates in the short run, all else equal. In each case be sure to (1) make a prediction for interest rates (up, down, or no change) and (2) illustrate your predictions with a supply/demand diagram for the money market. a. Real aggregate income falls (Y down) as the economy enters a recession b. The Central Bank reduces the size of the nominal money supply (MS down) c. A significant fall in the price of oil pushes the price of goods down (P down) d. The expected rate of inflation increases ( e up)
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