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EC140 Lecture Notes - Lecture 17: Aggregate Demand, Money Supply, Demand Curve

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School
WLU
Department
Economics
Course
EC140
Professor
Ken Jackson

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EC140 Full Course Notes
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Document Summary

Does an increase in the money supply lead to changes in interest rates. Does a change in interest rates lead to an increase in investment, consumption, and net exports. Does an increase in aggregate expenditure lead to an increase in incomes and not just prices. How fast do input prices adjust eliminating any gains from aggregate demand. How does a change in the money supply affect interest rates. Agree to pay interest or lend money at a set interest rate to determine the market interest. Ignore the money supply and target interest rates directly rate. Difficult to know the slope and position of the money curve. Difficult to know when the money demand curve will shift. Difficult to control the money supply where banks can change target reserve ratios. The interest rate will fluctuate if the bank targets the money supply. It is easier to do so directly if the bank wants to target the interest rate.

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Related Questions

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply generates:

a. lower interest rates, which causes an increase in planned real investment spending and an increase in aggregate demand.

b. spending on consumer goods and services directly, which causes an increase in aggregate demand.

c. an increase in nominal GDP and a change in the price level, but no change in real GDP.

d. an increase in aggregate supply since the supply of money is part of aggregate supply.

Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply? How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment? Why might monetary policy fail? What does inflation targetingmean?

Which of the following can help to explain why higher inflation may lead to currency appreciations?

(a) The interest rate is not the prime target of monetary policy.

(b) Most central banks adjust their policy interest rates expressly so as to keep inflation in check.

(c) Central banks increase the money supply leading to overshooting of the exchange rate.

(d) Inflation will increase the purchasing power of a currency.

(e) The world market does not adjust their currency trade to reflect inflation