CH15 - The influence of monetary policy on aggregate demand

Question 1

Theory of Liquidity Preference

Answer 1

A theory of interest rate determination for the short run
- The “interest rate” adjusts to balance the supply of, and demand for, money in the market for money
- The interest rate is the price of money: people prefer liquidity and will only give up liquidity/cash if its price (if the cost of holding wealth in the form of money) rises

Question 2

monetary policy

Answer 2

set of tools used by a nation’s central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements