rev ch 24 - demand increases by more than $3 billion. On...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
REV CHAP 24 1. The Keynes’s theory that the interest rate adjusts to bring money supply and money demand into balance. At the equilibrium interest rate and the fixed quantity of money supply, the quantity of money demand depends on changes in interest rate. Quantity of money demand increases as interest rate falls, and vice versa. Thus the aggregate-demand curve is downward sloping. 2. A decrease in money supply will raise the interest rate and reduces the quantity of goods and services demanded for any given price level, thus shifting the aggregate-demand curve to the left. 3. The government spending of $3 billion to purchase police cars raises employment and profits at police car manufacturers. Workers have more earning and owners have more profits. They would spend more on consumer goods. As a result, the government purchase of police cars raises the demand for the products and many other firms in the economy. Thus, the aggregate
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

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.

Ask a homework question - tutors are online