The Advent of Interest-Earning Checking Accounts in the Early 1980s

Essay

The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their wealth in checking accounts. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.