Question

Suppose a computer virus disables the nation’s automatic teller machines, making withdrawals from bank accounts less convenient. as a result, people want to keep more cash on hand, increasing the demand for money. assume the fed does not change the money supply. according to the theory of liquidity preference, the interest rate , which causes aggregate demand to . if instead the fed wants to stabilize aggregate demand, it should the money supply by government bonds.

Answer 1

If the bank chooses to stabilize the money supply without releasing more money, then it should allow bonds that can be circulated. It can also allow another form of transaction that will be used by people to spend their cash without withdrawing too much.