Question

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3. According to the Theory of Liquidity Preference, a fall in the price level reduces the amount of money that people wish to hold. As a result, falling interest rates stimulates investment spending and aggregate demand. Give an example of this and explain.

Answer 1

The liquidity trap occurs when interest rates are at or close to 0%, but people still hoard cash instead of spending or investing it, hampering monetary ...

Step-by-step explanation:

An increase in the money supply reduces the equil interest rate for any given price level. Because a lower interest rate stimulates investment spending, ...