ECON 200 Lecture Notes - Lecture 18: Demand For Money, Real Interest Rate, Government Spending

• School: University of Arizona
• Department: Economics
• Course: ECON 200
• Professor: Ryan Johnson

Document Summary

Monetary and fiscal policymakers sometimes use the policy levers at their disposal to try to offset the shifts in aggregate demand and stabilize the economy. The aggregate-demand curve shows the total quantity of goods and services demanded in the economy for any price level. There are three main reasons why the curve slopes downward: The (cid:449)ealth effe(cid:272)t: lo(cid:449)er pri(cid:272)e le(cid:448)els raise the real (cid:448)alue of households" (cid:373)o(cid:374)ey holdi(cid:374)gs, increasing the quantity of goods and services demanded. The interest-rate effect: lower price levels reduce the amount of money people want to hold, stimulating investment spending and increasing the quantity of goods and services demanded. The exchange-rate effect: lower price levels reduce the interest rate, stimulating spending on net exports and increasing the quantity of goods and services demanded. For the u. s. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.