ECO1102 Lecture 15: Chapter 15

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4 Aug 2016
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Chapter 15:
The Influence of Monetary And Fiscal Policy On Aggregate Demand
- THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE
DEMAND
- In this chapter we examine in more detail how the government’s tools of monetary and
fiscal policy influence the position of the aggregatedemand curve.
- We will also see how the tools of monetary and fiscal policy can shift the aggregate-
demand curve and, in doing so, affect short-run economic fluctuations.
HOW MONETARY POLICY INFLUENCES AGGREGATE DEMAND
-  T he aggregate-demand curve slopes downward for three reasons:
1. The Wealth Effect
2. The Interest Rate Effect
3. The Real Exchange Rate Effect
- The Interest Rate Effect is the most important reason for the downward slope of the
aggregate-demand curve.
The Theory of Liquidity Preference
-The theory of liquidity preference: Keynes’s theory that the interest rate adjusts to
bring money supply and money demand into balance.
-In the analysis that follows, the expected rate of inflation is held constant.
The Theory of Liquidity Preference: Money Supply
- The Bank of Canada alters the money supply using two methods:
oChanging the bank rate
oOpen-market operations
Buying and selling federal government bonds
Foreign-exchange market operations
CAN buying US $
Figure 15.4 – equilibrium in the money market – opportunity cost is higher possible exam q?
- how we move on agg. Demand if move prices
Figure 15.5 IMPORTANT
- consume less today cuz cant consume more tomorrow
- about the investment (ie. Houses)
- prices higher, than higher. Aggregate b/w
- No q’s about open market and flexible exchange rate
-
Changes In Money Supply
-15.6 Closed Economy
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