420 Ch 7

420 Ch 7 - 7.1 Factors that affect equilibrium income and...

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7.1 Factors that affect equilibrium income and the interest rate Monetary Influences: Shifts in the LM schedule The increase in money supply creates an excess supply of money, which causes the  interest rate to fall. Real Influences: Shifts in the IS schedule Fiscal policy variable are one set of factors that shift the IS schedule and hence affect  equilibrium income and the interest rate With an increase in government spending,  the force pushing up income is the  increase in aggregate demand both directly as government demand rises and then  indirectly as a result of an income-induced increase in consumer expenditures.  The rise in income, in response to expansionary fiscal policy, necessitates the interest- rate adjustment. Thus, this income-induced increase in money demand and decline in the bond demand  cause the interest rate to rise.  Other than fiscal policy changes, any 
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This note was uploaded on 02/23/2012 for the course ECON 420 taught by Professor Hill during the Fall '08 term at UNC.

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420 Ch 7 - 7.1 Factors that affect equilibrium income and...

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