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    Suppose banks install automatic teller machines on every block and, by making cash readily available, reduce the amount of money people want to hold.

    a. Assume the Fed does not change the money supply. According to the theory of liquidity preference, what happens to the interest rate? What happens to the aggregate demand?
    b. If the Fed wants to stabilize aggregate demand, how should it respond?

    © BrainMass Inc. brainmass.com December 24, 2021, 9:55 pm ad1c9bdddf
    https://brainmass.com/economics/supply-and-demand/government-steps-stabilize-aggregate-demand-424703

    SOLUTION This solution is FREE courtesy of BrainMass!

    a. Assume the Fed does not change the money supply. According to the theory of liquidity preference, what happens to the interest rate? What happens to the aggregate demand?

    People would be holding less cash and therefore, the banks would have more demand deposits. When this happens, the banks would want to lend money because they would not want to keep a pile of cash inside the building. To encourage borrowing, the banks would have to offer low interest rate. Aggregate demand would increase so is income and employment.

    b. If the Fed wants to stabilize aggregate demand, how should it respond?

    To stabilize aggregate demand, the FED can start selling bonds to the banks. In addition, they can raise the interest rate on government bond.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 9:55 pm ad1c9bdddf>
    https://brainmass.com/economics/supply-and-demand/government-steps-stabilize-aggregate-demand-424703

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