Consider the equilibrium in the money market is given by M/P=L(Y,i), where M denotes the money supply, P the fixed aggre
Posted: Thu May 26, 2022 7:53 am
Consider the equilibrium in the money market is given by
M/P=L(Y,i), where M denotes the money supply, P the fixed aggregate
price level, i denotes the nominal interest rate and Y aggregate
real income. Suppose that the money market starts at the
equilibrium. Now assume that money supply is increased (everything
else constant). Using a diagram to illustrate your answer, explain
how the interest rate adjusts to maintain the money market
equilibrium in the context of the “theory of liquidity
preference”.
M/P=L(Y,i), where M denotes the money supply, P the fixed aggregate
price level, i denotes the nominal interest rate and Y aggregate
real income. Suppose that the money market starts at the
equilibrium. Now assume that money supply is increased (everything
else constant). Using a diagram to illustrate your answer, explain
how the interest rate adjusts to maintain the money market
equilibrium in the context of the “theory of liquidity
preference”.