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Economics

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Define the Keynesian Theory of Liquidity Preference.

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Suppose that a given economy, in which the level of production (Y) is not at the natural level (Yn), an economy in which Y#Yn. 1) Using the AS/AD model, give an explanation of what will happen in the future and suggest a fiscal and/or a monetary policy to adjust the output and further analyse the effect of the suggested policy on employment and price level. 2) Illustrate your answer in part 1) by presenting and analysing data from the UK by identifying two occasions since 1950 (each covering a span of 2-5 years), where such an adjustment process occurred.
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Question 1 Discuss, by means of appropriate diagrams and explanation, the Keynesian liquidity trap. Depict both the LM curve and aggregate demand (AD) curve, and explain their appearance, in the case of the liquidity trap. If you were to advise the policymakers on which action to take, what would be your advice?
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