Chapter 34

I would give this chapter a 1.5 out of three. It started by talking about some the of the variables discussed in the previous chapter. It mentioned the wealth affect, interest rate affect, and the exchange rate affect. It talks about how monetary policy can affect aggregate demand. It then talks about the theory of liquidity. Money supply is not affected by interest rates because its the fed that determines the money supply through open market operations or setting the reserve rate. Interest rates do however affect the demand for money because it is the most liquid form of asset available. As interest rates go up the cost of holding money is higher as it could be earning interest in a bank. This will decrease demand for money. The equilibrium interest rate balances the quantity supplied with demand. As interest rates rise this was also cause production to decrease because of the lowered investment and increased saving.