(Solved): 2. The theory-of liquidity preference and the downward-slopingaggregate demand curve Suppose the mo ...

2. The theory-of liquidity preference and the downward-slopingaggregate demand curve Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (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. Following the price level decrease, the quantity of money demanded at the initial interest rate of \( 6 \% \) will be than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to their money holdings. In order to do so, they will bonds and other interest-bearing assets, and bond issuers will realize that they interest rates until equilibrium is restored in the money market at an interest rate of The following graph plots the aggregate demand curve for this economy. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. The change in the inkerest rate found in the previous tosk will lead to a in residential and business spending, which will cause in the quantity of output demanded in the economy.