Lecture Notes 7

Lecture Notes 7 - 20/04/11 Fed Policy: MS and FFR: the Fed...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
20/04/11 Fed Policy: MS and FFR: the Fed cannot control both of these directly, but instead has a target for the FFR. It will try and reach the FFR target by adjusting its money supply. Fiscal Policy: An increase in G or a cut in T, either one of those, will increase aggregate expenditure. The increase aggregate expenditure will lead to a change in GDP. This is not as straightforward as it seems – this assumes away price level changes o An increase in GDP* to GDP’ – when the government increases its expenditure levels or cut taxes there is a secondary effect o What is the source of the government’s money? In order to increase expenditure he is borrowing, via U.S. Treasury bills. o An increase in government expenditure or a cut in taxes tends to increase aggregate expenditure. There is an effect on the money supply and demand curve. o Money demanded – market for loans, the government has increased their demands for loans – pushing interest rates up, money demanded goes up. (Financial markets) o Increase in interest rates has an effect on investment. Interest rate is higher, investment demand falls, so aggregate expenditure is lower (AE = C + I + G + NX) o This phenomenon accounts for the fact that prices change – assumed away in the strict Keynesian
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

Lecture Notes 7 - 20/04/11 Fed Policy: MS and FFR: the Fed...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online