Chapter 24 - Chapter 24 Lectures Supratim Das Gupta...

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Chapter 24 Lectures Supratim Das Gupta
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Introduction Short-run effects of Monetary and Fiscal Policy work through changes in Aggregate Demand Recall, AD curve slopes downward for three reasons: Wealth effect Interest-rate effect Exchange-rate effect the most important of these effects for the U.S. economy THE INFLUENCE OF MONETARY AND FISCAL POLICY
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THE INFLUENCE OF MONETARY AND FISCAL POLICY 3 The Theory of Liquidity Preference Proposed by John Maynard Keynes in his classic book The General Theory of Employment, Interest, and Money 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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THE INFLUENCE OF MONETARY AND FISCAL POLICY 4 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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MONETARY AND FISCAL POLICY 5 Money Demand Suppose real income ( Y ) rises. Other things equal, what happens to money demand? If Y rises: Households want to buy more goods so they need more money. To get this money, they attempt to sell some
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Chapter 24 - Chapter 24 Lectures Supratim Das Gupta...

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