Chapter 34 -- Carlos Pitta

Chapter 34 -- Carlos Pitta - Chapter 34 The Influence of...

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CHAPTER 34 THE INFLUENCE OF MONETARY AND FISCAL POLICY 1 Chapter 34 The Influence of Monetary Policy and Fiscal Policy On Aggregate Demand Instructor: Carlos Pitta
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CHAPTER 34 THE INFLUENCE OF MONETARY AND FISCAL POLICY 2 In this chapter, look for the answers to these questions: How does the interest-rate effect help explain the slope of the aggregate-demand curve? How can the central bank use monetary policy to shift the AD curve? In what two ways does fiscal policy affect aggregate demand? What are the arguments for and against using policy to try to stabilize the economy? 0
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CHAPTER 34 THE INFLUENCE OF MONETARY AND FISCAL POLICY 3 Introduction Earlier chapters covered: the long-run effects of fiscal policy on interest rates, investment, economic growth the long-run effects of monetary policy on the price level and inflation rate This chapter focuses on the short-run effects of fiscal and monetary policy, which work through aggregate demand. 0
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CHAPTER 34 THE INFLUENCE OF MONETARY AND FISCAL POLICY 4 Aggregate Demand Recall, the AD curve slopes downward for three reasons: the wealth effect the interest-rate effect the exchange-rate effect Next: a supply-demand model that helps explain the interest-rate effect and how monetary policy affects aggregate demand. the most important of these effects for the U.S. economy 0
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CHAPTER 34 THE INFLUENCE OF MONETARY AND FISCAL POLICY 5 The Theory of Liquidity Preference A simple theory of the interest rate (denoted r ) r adjusts to balance supply and demand for money Money supply: assume fixed by central bank, does not depend on interest rate 0
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CHAPTER 34 THE INFLUENCE OF MONETARY AND FISCAL POLICY 6 The Theory of Liquidity Preference Money demand reflects how much wealth people want to hold in liquid form. For simplicity, suppose household wealth includes only two assets: Money – liquid but pays no interest Bonds – pay interest but not as liquid A household’s “money demand” reflects its preference for liquidity . The variables that influence money demand: Y , r , and P . 0
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CHAPTER 34 THE INFLUENCE OF MONETARY AND FISCAL POLICY 7 Money Demand Suppose real income ( Y ) rises. Other things equal, what happens to money demand? If Y rises: so they need more money. To get this money, they attempt to sell some of their bonds. I.e. , an increase in Y causes an increase in money demand, other things equal. 0
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Think!     The determinants of money demand The determinants of money demand A. Suppose r rises, but Y and P are unchanged. What happens to money demand? B. Suppose P rises, but Y and r are unchanged. What happens to money demand?
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This note was uploaded on 01/10/2011 for the course AEB 2514 taught by Professor Evandrummond during the Spring '09 term at University of Florida.

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Chapter 34 -- Carlos Pitta - Chapter 34 The Influence of...

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