ECON 2000 Chapter : Aggregate Demand II.docx
27 Dec 2014
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Ex: increase in money supply: theory of liquidity preference: for any given level of income, increase in money balance = lower interest rate, lm shifts downwards (right) = lower interest rate but raises level of income, increase money supply = people have more money than they want to hold, people deposit extra money in banks or buy bonds, interest rate falls until people are willing to hold all extra money that boc created, lower interest rate = more investment = increase pe, production and income. Ex: restriction imposed on credit card availability: people choose to hold more money = increase interest rate, lm shifts right = raises interest rate and depresses income. Stock market fell again: attacks increased uncertainty; reduced spending by households an firms, is went further left, accounting scandals conducted by prominent corporations, companies declared bankruptcy, depressed stock prices further, discouraged business investment.
