1. What is the mathematical specification of the demand for money function in Liquidity Preference?
2. If the speculative motive of money demand is such that changes in interest rates lead to major changes in the amount of money demanded, is the money demand function relatively steep or flat?
3. Graphically illustrate using the Theory of Liquidity Preference how interest rates are determined. Starting from an initial equilibrium interest rate, show what happens to equilibrium if the money supply is increased.
4. Is the demand for money function a stable relationship that we can count on during any two-quarter period, or is it unstable? Why would we care about this stability or instability? Illustrate and explain.
5. What factor(s) determine the slope of the LM function?
6. If we find that a change in interest rates leads to almost no change at all in the demand for money, what will be the shape of the LM curve?
7. What factor(s) will cause the LM function to shift up?
8. If the size of RGDP changes, do we move along an existing LM curve, or do we shift the entire LM curve? Explain.
9. Assume that the Fed has pursued an expansionary monetary policy. Which way would the LM curve move under this policy?
10. Is the LM curve steep or flat during a deep recession? During a booming, full-employment economy? Why would knowing this matter?