•The Theory of Liquidity Preference: Keynes’s theory that the interest rate
adjusts to bring money supply and money demand into balance
•Money Supply: The Fed alters the money supply primarily by changing
the quantity of reserves in the banking system through the purchase and
sale of government bonds in open-market operations.
•Money Demand: An increase in the interest rate raises the cost of holding
money and, as a result, reduces the quantity of money demanded. A
decrease in the interest rate reduces the cost of holding money and
raises the quantity demanded.
•Equilibrium in the Money Market: The forces of supply and demand in the
market for money push the interest rate toward the equilibrium interest
rate, at which people are content holding the quantity of money the Fed
has created.
•The Downward Slope of the Aggregate-Demand Curve: An increase in
the price level raises money
demand and increases the interest rate that brings the money market into
equilibrium.
HOW
MONE
TARY
POLIC
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