LecNote05-1 - The Influence of Monetary on Aggregate Demand...

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The Influence of Monetary on Aggregate Demand Slide #05 July 07 2010 Intro Macro 1
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Monetary Policy Influences Aggregate Demand Aggregate-demand curve slopes downward: The wealth effect The interest-rate effect The exchange-rate effect Occur simultaneously: When price level falls Quantity of goods and services demanded increases When price level rises Quantity of goods and services demanded decreases Intro Macro 2
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Monetary Policy Influences Aggregate Demand For U.S. economy The wealth effect Least important Money holdings a small part of household wealth The exchange-rate effect Not large Exports and imports small fraction of GDP The interest-rate effect The most important Intro Macro 3
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Monetary Policy Influences Aggregate Demand The theory of liquidity preference Keynes’s theory Interest rate adjusts: To bring money supply and money demand into balance Nominal interest rate Real interest rate Intro Macro 4
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Monetary Policy Influences Aggregate Demand The theory of liquidity preference Money supply Controlled by the Fed Quantity of money supplied Fixed by Fed policy Doesn’t vary with interest rate Intro Macro 5
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Monetary Policy Influences Aggregate Demand The theory of liquidity preference Money demand Money most liquid asset Interest rate opportunity cost of holding money Money demand curve downward sloping A household’s “money demand” reflects its preference for liquidity. The variable that influence money demand: Y, r and P Intro Macro 6
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7 Money Demand Suppose real income ( Y ) rises. Other things equal, what happens to money demand? If Y rises: Households want to buy more g&s, so they need more money. To get this money, they attempt to sell some of their bonds. I.e. , an increase in Y causes an increase in money demand, other things equal.
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A. Suppose r rises, but Y and P are unchanged. What happens to money demand? B. Suppose P rises, but Y and r are unchanged. What happens to money demand? Another examples: The determinants of money demand 8
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A. Suppose r rises, but Y and P are unchanged. What happens to money demand?
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