Econ- Chap 15

Econ- Chap 15 - Overview-chapter 15: MP and FP: Impacts on...

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Unformatted text preview: Overview-chapter 15: MP and FP: Impacts on AD The supply and demand for money including the interest-rate effect on AD How monetary policy affects the aggregate demand curve. How fiscal policy affects aggregate demand. Changes in G or T. Arguments for and against using policy to try to stabilize the economy. Aggregate Demand (AD) Many factors influence AD, including desired spending by households and business firms. When desired spending changes, shifts in the AD cause short-run fluctuations in output and employment. Monetary and Fiscal policy can be used to stabilize the economy during these fluctuations. Offset shifts. How Monetary Policy Influences Aggregate Demand The Aggregate Demand curve is downward sloping due to three effects: Pigous Wealth Effect Keyness Interest-Rate Effect Real Exchange-Rate Effect Of these three effects, Keyness Interest- Rate Effect and the x-rate effect are most important. These 2 effects are influenced by MP. Theory of Liquidity Preference (LP): Keyness theory: The development of interest rates LP where liquidity refers to liquid assets- money is the most liquid. The Liquidity Preference Theory (MD) of interest rates states that ...market rates of interest adjust to balance the supply and demand for money. At higher interest rates you want to be less liquid. Ms determined by B of C Theory of LP Money demand reflects how much wealth people want to hold in liquid form-as money. For simplicity, suppose household wealth includes only two assets: Money liquid but pays no interest--OC Bonds pay interest but not as liquid A households money demand reflects its preference for liquidity . The variables that influence money demand: Y , r , and P . Theory of Liquidity Preference: The Supply and Demand for Money The Money Supply is controlled by the B of C, which alters the money supply in three ways: Open-Market Operations Changing the Overnight Rate Buying and selling Canadian dollars in the market for foreign-currency exchange The quantity of money supplied in the economy is fixed at whatever level the B of C decides to set it. Theory of Liquidity Preference: The Supply and Demand for Money Because the money supply is fixed by the B of C it does not depend on the interest rate. The fixed money supply is represented by a vertical supply curve. The Money Market Interest Rate Quantity of Money Money Supply Q Fixed Theory of Liquidity Preference: The Supply of Money By using Open-Market Operations the B of C can shift the vertical money supply curve left or right. If the B of C buys government bonds: Bank reserves increase and the money supply increases....
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Econ- Chap 15 - Overview-chapter 15: MP and FP: Impacts on...

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