In almost all economies, money supply grows every year. this happens to be the case even...
In almost all economies, money supply grows every year. this happens to be the case even when the central bank is not trying to change the level of interest rates in the economy. According to the liquidity preference framework, how can interest rate stay the same even when money supply is growing?
Please Explain clearly with the help of a diagram. (Written in word format preferred)
Homework Answers
Ans
Well under such circumstance money supply rise from Mso to Ms1 either through credit creation or through increase in money supply. However interest rate remains same at r because money demand at each interest rate rises as shown by money demand curve Md1 instead of earlier money demand curve Md
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