Use theory of liquidity preference to show influence policy

Reference no: EM1398331

Q: The Federal Reserve expands money supply by 5%

a.Use theory of liquidity preference to show the influence of this policy on interest rate.

b.Use model of aggregate demand and aggregate supple to show the influence of this change in interest rate on output and the price level in the short run.

c.When economy makes the transition from its short run equilibrium to its long run equilibrium, what will occur to the price level?

d.How will this change in price level affect demand for money and equilibrium interest rate?

e. Is this analysis consistent with proposition which money has real effects in short run but is neutral in long run?

Reference no: EM1398331

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