When seeking to explain the low interest rates in 2005, the article "Excess Savings or Excess Liquidity?" makes the case that
A)excess liquidity is the primary cause since it would cause LM to shift downward leading to low interest rates and higher GDP
B)excess liquidity is the primary cause since it would cause IS to shift downward leading to low itnerest rates and lower GDP
C)excess savings is the primary cause since it would cause LM to shift downward leading to low interest rates and higher GDP
D)excess savings is the primary cause since it would cause IS to shift downward leading to low interest rates and lower GDP

Question

Quizplus · Accepted Answer

DA) Excess liquidity can lead to lower interest rates and higher GDP by increasing the money supply, which shifts the LM curve downward. This is because with more liquidity in the economy, banks are more willing to lend, which can reduce interest rates and stimulate investment and consumption, leading to higher GDP.D) Excess savings can lead to lower interest rates through a different mechanism. When there is excess savings, it means that there is more supply of loanable funds than demand. This excess supply can cause the interest rate to fall. The shift in the IS curve downward reflects a decrease in investment demand due to lower consumption and higher savings, leading to lower interest rates. However, the impact on GDP can be complex; while lower interest rates can stimulate investment, higher savings can reduce consumption, potentially leading to lower GDP in the short run.

When Seeking to Explain the Low Interest Rates in 2005