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Unformatted text preview: demand increases by more than $3 billion. On other hand, the government spending of $3 billion to purchase police cars also causes interest rate to rise; a higher interest rate reduces investment spending and puts downward pressure on aggregate demand. Thus, the aggregate demand increases by less than $3 billion 4. If policymakers do nothing, aggregate demand is reduced. To stabilize aggregate demand, Fed can expand money supply to lower interest rate and thus expand aggregate demand. If Fed does nothing, Congress may impose fiscal policy such as tax cut to stabilize the aggregate demand. 5. Example of automatic stabilizers is government spending. When economy goes into a recession, workers are laid off, more people apply for welfare benefits and income support. This automatic increase in government spending stimulates aggregate demand at exactly the time when aggregate demand is insufficient to maintain full employment....
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This note was uploaded on 06/20/2011 for the course ECON 123 taught by Professor Mrews during the Spring '11 term at Korea Advanced Institute of Science and Technology.
- Spring '11