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1 Describe where the liquidity demandmoney supply equilibrium appea

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1. Describe where the liquidity-demand/money supply
equilibrium appears on the graph. 2. Suppose in this
period the interest rate is io. Is this higher or lower than
the equilibrium interest rate? 3. Will next period\'s interest
rate be higher or lower than this period\'s? 4. How will this
adjustment occur? (Assume that the parameters remain
constant; the curves do not shift.)
Solution
1). Where L^d Curve cuts the M^s/P curve is the the
liquidity-demand/money supply equilibrium
2).interest rate is i0 Is this higher than the equilibrium
interest rate
3).L^d curve will shift to right which will result in higher
interest rate.
4) GDP is considered exogenous to the liquidity
preference function, changes in GDP shift the curve. For
example, an increase in GDP will increase transactions
which will increase the demand for money for given
interest rates, and cause the Liquidity preference curve to
shift to the right.

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1. Describe where the liquidity-demand/money supply equilibrium appears on the graph. 2. Suppose in this period the interest rate is io. Is this higher or lower than the equilibrium interest rate? 3. Will next period \'s interest rate be higher or lower than this period\'s? 4. How will this adjustment occur? (Assume that the parameters remain constant; the curves do not shift.) Solution 1). Where L^d Curve cuts the M^s/P curve is the the liquidity-demand/money supply equilibrium 2).interest rate is i0 Is this higher than the equilibrium interest rate 3).L^d curve will shift to right which wi ...
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