ECON 1BB3 Lecture Notes - Automatic Stabilizer, Fiscal Policy, Aggregate Demand
6 Apr 2014
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ECON 1BB3 Full Course Notes
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Summary of lecture notes from chapter 16 and practice questions. Key points: in developing a theory of short-run economic fluctuations, keynes proposed the theory of liquidity preference to explain the determinants of the interest rate. According to this theory, the interest rate adjusts to balance the supply and demand for money: an increase in the price level raises money demand and increases the interest rate that brings the money market into equilibrium. Because the interest rate represents the cost of borrowing, a higher interest rate reduces investment and, thereby, the quantity of goods and services demanded. In a small open economy, an increase in the price level also increases the real exchange rate. An increase in the real exchange rate makes canadian-produced goods and services more expensive relative to foreign-produced goods and services. As a result, canada"s net exports fall, reducing the quantity demanded of canadian goods and services.
