natural level as does the unemployment rate and the price level is higher A

Natural level as does the unemployment rate and the

This preview shows page 17 - 20 out of 25 pages.

natural level, as does the unemployment rate and the price level is higher A decrease in velocity causes the AD curve to shift to the left Real GDP falls; Price level falls Unemployment level rises as GDP falls The economy is in a recessionary gap In the short run a decrease in velocity lowers Real GDP and increases unemployment rate In the long run, Real GDP returns to its natural level, as does the unemployment rate The Monetarist View of the Economy: Economy is self-regulating Changes in velocity and the money supply can change aggregate demand Changes in velocity and the money supply will change the price level and Real GDP in the short run but only the price level in the long run 14 – 4: Money and Interest Rates What Economic Variables Does a Change in the Money Supply Affect? Supply of loans, Real GDP and Price Level Money and the Supply of Loans: o When the Fed conducts an open market purchase, the supply of loans rises o When the Fed conducts an open market sale, the supply of loans falls Money and Real GDP : o In the short run an increase in the money supply will increase price level and Real GDP o A decrease in the money supply produces a lower level of Real GDP and lower price level Changes in the money supply can affect… The supply of loans 17
Image of page 17
Real GDP Price Level The expected inflation rate The Money Supply, the Loanable Funds Market and Interest Rates: The demand for loanable funds is downward sloping o Borrowers will borrow more funds as the interest rate drops The supply for loanable funds is upward sloping o Lenders will lend more funds as the interest rate rises If there is a surplus of loanable funds, the interest rate falls If there is a shortage of loanable funds, the interest rate rises The supply of loans, Real GDP, the price level and the expected inflation rate affect either the supply or demand side and in turn affect the interest rate Supply of Loans: A Fed open market purchase increases reserves in the banking system and therefore increases the supply of loanable funds Interest rate declines Liquidity Effect: the change in the interest rate due to a change in the supply of loanable funds Real GDP: As real GDP rises, individuals become wealthier, and they tend to buy more bonds (extend more loans) The supply of loanable funds increases When Real GDP rises, corporations issue or supply more bonds, thereby demanding more loanable funds As Real GDP increases, both supply and demand for loanable funds increases The interest rate rises Income Effect: the change in interest rate due to a change in Real GDP The Price-Level Effect: The change in the interest rate due to a change in the price level 18
Image of page 18
With respect to the interest rate effect, when the price level rises, the purchasing power of money falls People may therefore increase their demand for credit or loanable funds to borrow the funds necessary to buy a fixed bundle of goods Expectations Effect: the change in interest rate due to a change in expected inflation rate
Image of page 19
Image of page 20

You've reached the end of your free preview.

Want to read all 25 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture