2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money

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2. The theory of liquidity preference and the downward-slopingaggregate demand curve The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. ? TEREST RATE (Percent) 6 15 12 ❤ Money Supply Money Demand Money Supply

ls INTEREST RATE (Percent) 15 12 10 Money Supply Money Demand 20 30 40 MONEY (Billions of dollars) 50 60 Money Demand Money Supply After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be A than t

After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be money supplied by the Fed at this interest rate. People will try to and other interest-bearing assets, and bond issuers will find that they new equilibrium at an interest rate of The following graph shows the economy's aggregate demand curve. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. RICE LEVEL 180 150 120 than the quantity of bonds their money holdings. In order to do so, people will Interest rates until the money market reaches its 8 Aggregate Demand

PRICE LEVEL 180 150 120 90 60 30 0 0 1 20 Aggregate Demand 40 60 80 OUTPUT (Billions of dollars) 100 120 Aggregate Demand ?

PRICE LEVEL 150 120 90 60 30 0 0 20 Aggregate Demand 40 60 80 OUTPUT (Billions of dollars) 100 120 Aggregate Demand The change in the interest rate that you found previously will cause residential and business investment spending to in the quantity of output demanded in the economy. leading to