00:01
In question three, we've been given a scenario in which a computer virus disables the nation's automatic teller machines, making withdrawals from bank accounts less convenient.
00:11
As a result, people want to keep more cash on hand, thus increasing the demand for money.
00:18
In part a, we need to assume that the fed does not change the money supply.
00:23
According to the theory of liquidity preference, what happens to the interest rate? well, from the, from question one and two that we have already answered, we know that whenever we hear or read the words liquidity preference, we should immediately draw a simple supply and demand graph for the money market, like this one here on the top left.
00:44
On the x -axis, we have the quantity of money am.
00:47
On the y -axis, we have our interest rate are.
00:49
Our money supply curve will be fixed at ms1 since the fed does not alter the money supply.
00:56
But we know that the demand for money increases, so we have a rightward shift of the money demand curve from md1 to md2.
01:05
And as a result, the equilibrium interest rate will rise from r1 or r2.
01:10
Now, what happens to aggregate demand? well, let's think about it.
01:16
We have the economies facing a higher interest rate.
01:19
So this creates a disincentive for consumers to consume more because they want to save more money to get the higher interest rate.
01:29
And also businesses will have a disincentive to invest more since they're facing a higher interest rate and make and taking a loan is more costly.
01:37
So this will cause a leftward shift, the aggregate demand curve from 81 to 82...