Question

In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously.If we define money to include checking deposits, this legislation_____ money demand.If the Federal Reserve had maintained a constant money supply in the face of this change, this would have_____ the interest rate, and_____ aggregate demand and aggregate output. To have maintained a constant market interest rate (the interest rate on nonmonetary assets) in the face of this change, the Federal Reserve would have had to_____ the money supply. As a result, aggregate demand and output would have_____ .

Answer 1

The correct words to fill out the blank spaces are, in order: increased, lowered, reduce, increase, stable.

Step-by-step explanation:

• This legislation increased money demand - If checking deposits pay interest, more people will want to have money in this form.

• lowered the interest rate - the fed has increased the demand money, but keeping the supply stable. When demand exceeds supply, prices rise. The interest rate is the price of money, therefore, under this sceneario, it would augment.

• and reduce aggregate demand - a higher interest rate reduces investment, which is a component of aggregate demand.

• the Federal Reserve would have had to increase the money supply - As demand is now higher, to keep economic equilibrium, supply would have to increase proportionally to the new demand.

• Aggregate demand and output would have been stable - because the economy is now at a new equilibrum, since both the demand for money and the supply of money have risen equally, keeping the interest rate unchanged.