EC140 Lecture Notes - Lecture 14: Aggregate Supply, Monetary Reform, Aggregate Demand
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EC140 Full Course Notes
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Increases in prices make people poorer, reduce consumption. Under what conditions is expansionary fiscal policy most effective in increasing real. A bond pays out 1000$ in each of the 2 years. When there is an excess supply of money, households respond by attempting to buy bonds. The interest rate decreases and the price of bonds increases. Increase in price level increases money demand which leads to increase in interest rates. The neutrality of money: how effective is monetary policy, does increasing the money supply increase output, doubling bank deposits, the value of cash, and prices would have no effect. Monetary reform has tested this: key to effective monetary policy is slow adjustment of prices. Effective monetary policy: changing the money supply causes, a change in interest rates, which causes, a change in aggregate expenditure and aggregate demand, which causes: An increase in real gdp, and an inflationary gap, which causes: an increase in wages and input prices, which causes: