Theory of liquidity preference and market for real money

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Reference no: EM131108581

As an economy moves into a recession, income falls.

a. Use the theory of liquidity preference and the market for real money balances to illustrate graphically the impact of a decrease in income on the equilibrium interest rate. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.

b. Explain in words what happens to the equilibrium interest rate as a result of the fall in income.

Reference no: EM131108581

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