Question

Since the Federal Reserve has the power to determine the supply of money, the money supply curve in the liquidity preference model is a(n):_____________A) upward-sloping then vertical line when Congressional rules change the Federal Reserve's powers. B) upward-sloping line. C) horizontal line. D) vertical line

Answer 1

Answer:

D) vertical line

Explanation:

The liquidity preference simply means the demand for money, since money (cash) is the most liquid asset. The demand for money varies depending on the price for money, or the interest rate. The Fed determines the money supply by changing the interest rate, e.g. when the interest rate deceases, the Fed purchases securities and increases the money supply. The money supply curve is always vertical, since the Fed determines it by changing the interest rate.