Theory of liquidity preference

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Reference no: EM1367660

Suppose that the Bank of Canada decides to expand the money supply.
* Why would it be counterproductive for the Bank of Canada to fix the value of the exchange rate?
* What is the effect of this policy on the interest rate in the long run? How do you know?
* What characteristic of the economy makes the short-run effect monetary policy on the interest rate different from the long-run effect?

Suppose that survey measures of consumer confidence indicate that a wave of pessimism is sweeping the country.
* If policy makers do nothing, what will happen to aggregate-demand?
* What should the Bank of Canada do if it wants to stabilize aggregate-demand?
* If the Bank of Canada does nothing, what might Parliament do to stabilize aggregate-demand?

What is the theory of liquidity preference? How does it help explain the downward slope of the aggregate-demand curve?

Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregate-demand curve. Consider the effects in both a closed economy and a small open economy.

Reference no: EM1367660

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