DSST Money & Banking Part 1

Autonomous investment amount of investment

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Autonomous Investment:  Amount of investment expenditures that are due to factors other than income  and interest rates. Equilibrium level of income and output:  the only level of income and output toward which the economy  will gravitate and remain. IS Curve:  The locus of the equilibrium interest rate and output combinations for the product market.  The  IS Curve shows the interest rate and output combinations such that  aggregate demand equals GNP  and  that planned investment equals actual investment with no excess or shortage in inventories.  IS curve  slopes downward, since the lower the interest rate, the greater are expenditures, and thus equilibrium LM Curve:  The locus of combinations of interest rates and income levels for which the financial markets  are in equilibrium. Analyzing Monetary and Fiscal Policies: Fiscal Policy : Tax and Spending programs of the government.  Increases in government spending and  decreases in rates are called  expansionary or easy fiscal policies  as they lead to higher income levels.  The  reverse of these are called  contractionary or tight fiscal policies. Monetary policy:  In the context of the IS/LM model refers to policies that produce different money supplies.  An  increase in the money supply is referred to as  expansionary or easy monetary policy.   The reverse – a  decrease in the money supply is referred to as a  contractionary or tight monetary policy. Interest elasticity of Investment demand:  measures the sensitivity of investment expenditures to the interest  rate. The greater the interest elasticity of money demand:  the smaller the effect of changes in the supply of  money on the income (or output) level), and the greater the effect of changes in government spending  and tax rates on the income level Interest elasticity of money demand:  measures the sensitivity of money demand to the interest rate. The greater the interest elasticity of aggregate demand:  the greater the effect of changes in the  money supply on the income level, and the smaller the effect of changes in government spending and tax  rates on the income level. Crowding out:  The reduction in private demand when government spending increases.  A 100% crowding out  effect means that investment spending is reduced by exactly the amount of government increases. Inflation and Unemployment: Inflation:  continually rising prices.
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Sources of Inflation : Monetary Phenomenon (Friedman) because of continuous growth in the money supply,  Increase in Autonomous investment spending or  Aggregate Demand When Prices are Variable:
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