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ECN 204 Lecture Notes - Open Market Operation, Fiscal Policy, Aggregate Demand

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School
Ryerson University
Department
Economics
Course
ECN 204
Professor
Paul Missios

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Document Summary

Chapter 15: influence of monetary and fiscal policy on aggregate demand. Monetary and fiscal policy can each influence aggregate demand- a change in one of these policies can lead to a short-run fluctuation in output and prices. Vertical axis- interest rate horizontal axis- quantity of money. Aggregate demand curve: vertical axis- price level horizontal axis- quantity of output. The aggregate demand curve shows the total quantity of goods and services demanded in the economy for any price level. Ad slopes downward because of the wealth effect, the interest rate effect, and the exchange-rate effect. We will focus on the interest-rate effect because it the most important in a. We will see how policy can help short run economic fluctuations. Theory of liquidity preference: keynes"s theory that the interest rate adjusts to bring more money supply and money demand into balance. A simple theory of the interest rate (denoted r), r adjusts to balance supply and demand for money.

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Related Questions

Explain why the following statements are false.

a. “The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.”

b. “The long-run aggregate-supply curve is vertical because economic forces do not affect long-run aggregate supply.”

c. “If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.”

d. “Whenever the economy enters a recession, its long-run aggregate supply curve shifts to the left.”

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.

Monetary policy involves the use of money and credit controls to:
A. Shift the aggregate demand curve.
B. Shift the aggregate supply curve.
C. Move the economy along the aggregate demand curve.
D. Move the economy along the aggregate supply curve.