Question

Suppose there is a rash of pickpocketing. As a result, people want to keep less cash on hand, decreasing the demand for money. Assume the Fed does not change the money supply. According to the theory of liquidity preference, the interest rate will _______, which causes aggregate demand to ______. If instead the Fed wants to stabilize aggregate demand, it should _______ the money supply by _______ government bonds.

Answer 1

Fall & rise

decrease & selling

Step-by-step explanation:

The Liquidity Preference Theory in all stated that the demand for money is not necessary to borrow money but the desire to remain liquid that is there will be money is the interest rate Keynes in his definition of the liquidity preference theory stated the 3 motives behind this theory;they are;

a. transactions motive

b. precautionary motive

c. speculative motive

Answer 2

Fall;rise.

Decrease;selling.

Step-by-step explanation:

Suppose there is a rash of pickpocketing. As a result, people want to keep less cash on hand, decreasing the demand for money. Assume the Fed does not change the money supply. According to the theory of liquidity preference, the interest rate will fall, which causes aggregate demand to rise.

If instead the Fed wants to stabilize aggregate demand, it should decrease the money supply by selling government bonds.