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Define the Keynesian Theory of Liquidity Preference.
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- Outline the main concepts of the Liquidity Preference Theory proposed by John Maynard Keynes and discuss its applicability to the Caribbean region.How would the level of aggregate demand be affected by a rise in the interest rate in the Keynesian theory? Which components would be affected most strongly?Explain the cost of a recession from the keynesian spending model perspective.
- In the goods-and-services market actual inventories have started to rise above optimal inventories. What could have happened to autonomous money demand to bring this about? Explain and diagrammatically represent your answer. In doing so, be sure to explain and diagrammatically represent what happens to the rate of interest, investment, and Y. In explaining what happens to Y, be sure to fully explain the equilibrium process in the simple Keynesian modelIn one or two sentences, explain why Keynesian economists believe that increasing the money supply will be effective at increasing aggregate demand in the short run.In recent years, the US and few developed countries have interest rates falling to very low levels. Explain this situation according to Keynesian theory.
- evaluate the role of floating rates as automatic stabilisers when exogenous shocks hit the economy.Consider a standard Keynesian model but with two types of consumers, Type A who have low marginal propensities to consume and Type B who have high marginal propensities to consume. An economy with relatively more Type A consumers is more vulnerable to a negative shock to investment demand.Answer true, false, or uncertain. Please briefly explain your answer.Differentiate between the following terms. Assumptions in AD/AS models and assumptions in Keynesian models.
- How do the assets—money and bonds—differ in Keynes’s liquidity preference theory?What is the Theory of Liquidity Preference? How does it help explain the downward slope of the aggregate-demand curve?Assume a closed economy described by an IS-LM model. Explain what is meant by a liquidity trap, how such a condition can arise and what policies can be implemented to get out of it.