Final answer:
Economists study the money supply and liquidity because it significantly impacts economic activity, with high liquidity generally associated with more efficient markets and economies. Liquidity directly affects interest rates, inflation, and economic growth, addressing macroeconomic goals such as economic growth, low unemployment, and low inflation.
Step-by-step explanation:
Economists focus on the money supply and emphasize liquidity to assess the ease with which assets can be converted into cash—essential for the smooth functioning of an economy. Understanding liquidity is critical as it impacts numerous other economic variables such as interest rates, inflation, and economic growth which are crucial for achieving macroeconomic goals. The money supply influences aggregate demand, which is pivotal in the AD/AS model of macroeconomic analysis. Furthermore, variations in the money supply connect with monetary policy, affecting fiscal platforms such as government spending, taxation, and borrowing.
In macroeconomics, money serves various functions that are foundational for defining economic policies. Liquidity pertains to how quickly and without loss of value money or assets can be used for transactions. Hence, liquidity and the money supply are critical factors that play into achieving the objectives of economic growth, low unemployment, and low inflation. Evaluating liquidity also helps in understanding the effects of exchange rate movements on aggregate demand and international trade.