Asked by Iesha Tyler on Jun 30, 2024
Verified
How does a reduction in the money supply by the Fed make owning stocks less attractive?
Money Supply
The entire financial resource sum in an economy at a particular time.
Owning Stocks
Owning stocks means having equity or ownership in a corporation, granting the shareholder a claim on the company's assets and earnings, often accompanied by voting rights on corporate matters.
- Clarify the reasoning of the liquidity preference theory and how it influences aggregate demand.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
The reduction in the money supply raises the interest rate. So the return on bonds increases relative to the return on stocks. The increase in the interest rate also causes spending to fall, so that revenues and profits fall, making shares of ownership in corporations less valuable.
Learning Objectives
- Clarify the reasoning of the liquidity preference theory and how it influences aggregate demand.