QUESTIONS FOR REVIEW

I. ‘hat is the theory of liquidity preference? How does it help ‘explain the downward slope of the aggregate-demand curve?

2. Use the theory of liquidity preference .to explain how a decrease in. the money supply affects the aggregate-demand

3. The government spends $3 billion to buy police cars. ‘Explain why aggregate demand might increase by more than $3 billion. Explain why aggregate demand might increase by less than $3 billion.

4. Suppose that survey measures ~f consumer confidence indicate a wave of pessimism is .sweeping the country. If policymakers do nothing, what will happen to aggregate demand? What should the Fed do if it wants to stabilize aggregate demand? If the Fed does nothing, what might Congress do to stabilize aggregate demand?

“5. Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect