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Lecture 13

ECON 101 Lecture 13: ECON 101 CH.21 L13

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ECON 101

ECON 101 CH.21 L13 Influence of Monetary and Fiscal Policy on Aggregate Demand How r is Determined - MS curve is vertical, changes in R doesn’t affect MS, which is fixed by Fed - MD curve downward \: fall in r increases money demand - Fall in P reduces money demand, lowers r - Decrease in R, increase in I and quantity of g/s demanded - To reduce money supply: raise r by reducing money supply, also quantity of g/s demanded Monetary Policy and Aggregate Demand - Federal funds rate: banks charge each other on short-term loans - Macroeconomic goals achieved by Fed using monetary policy to shift the AD curve - To change interest rate and shift the AD curve, Fed conducts open market operations to change MS - Money supply: assume fixed by central bank, does not depend on interest rate Liquidity traps - Monetary policy stimulates AD by reducing interest rate - Liquidity trap: when the interest rate is zero - Monetary policy might not work, since nominal interest rate cannot be reduced further - Central bank can make real interest rates negative by raising inflation expectations - Central bank can do OMO by using mortgages and corporate debt which lowers rate on these loans Fiscal Policy and AD - Fiscal Policy: setting of the level of govt spending and taxation by govt policymakers - Expansionary fiscal policy o Increase in G and or increase in T shifts AD right - Contractionary fiscal policy o Decrease in G and or increase in T shifts AD left Two ways Fiscal Policy Effects AD 1) Multiplier Effect a. Additional
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