Suppose a computer virus disables the nations automatic teller machines, making

Question

Suppose a computer virus disables the nations automatic teller machines, making withdrawals from the bank accounts less convenient. As a result people want to keep more cash on hand, increasing the demand for money.
A) Assume the fed does not change the money supply. According to the theory of liquidity preference what happens to the interest rate?
B) If instead the Fed wants to stabilize agregate demand, how should it change the money supply?
C) if it wants to accomplish this change in the money supply using open-market operations, what should it do?

Explanation / Answer

Answer.)

A.) Shift in money demand to the right causes increase in interest rate. Because of higher costs of borrowing and returns to saving, aggregate demand shifts to the left.

B.)  The Fed should increase money supply. This shift in money supply would offset the change in interest rate.

C.) The Fed should buy government bonds.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.