ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Shifts money demand to the right and increases the interest rate
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Shifts money demand to the left and increases the interest rate.
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Shifts money demand to the right and decreases the interest rate
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Shifts money demand to the left and decreases the interest rate.
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Does none of the above.
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Detailed explanation-1: -When money demand is drawn on a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level shifts money demand to the right. Keynes’s theory of liquidity preference suggests that the interest rate is determined by the supply and demand for money.
Detailed explanation-2: -The left vertical axis shows the value of money, and the right vertical axis shows the price level. The supply curve for money is vertical because the quantity of money supplied is fixed by the Fed.
Detailed explanation-3: -When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money. When the value of money is on the vertical axis, the money supply curve is vertical and shifts right if the Federal Reserve buys bonds.
Detailed explanation-4: -The money supply curve is vertical because the Fed sets the amount of money available without consideration for the value of money. The money demand curve slopes downward because as the value of money decreases, consumers are forced to carry more money to make purchases because goods and services cost more money.