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ECN 204 Lecture Notes - Exchange Rate, Tax Cut, Unemployment Benefits

64 views5 pages
jadegnat800
22 Oct 2012
School
Ryerson University
Department
Economics
Course
ECN 204
Professor
Christos Shiamptanis

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Document Summary

Influence of monetary and fiscal policy on aggregate demand. Short-run effects of fiscal and monetary policy, which work through aggregate demand. Recall, ad curve slopes downward for three reason: Interest-rate effect most important of these effects for the economy. Study model that helps explain the interest-rate effect and how monetary policy affects aggregate demand. Simple theory of the interest rate (denoted r) R adjusts to balance supply and demand for money. Money supply: assume fixed by central bank, does not depend on interest rate. Money demand reflects how much wealth people want to hold in liquid form. For simplicity, suppose household wealth includes only two assets: Money liquid buy pays no interest. Bonds pay interest but not as liquid. A household"s money demand reflects its preference for liquidity. Variables that influence money demand: y, r, and p. Households want to buy more good & service, so they need more money.

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Related Questions

An expansionary monetary policy may address the recessionary effects of a decline in aggregate demand by:

    1. Increasing interest rates to stimulate aggregate demand

    2. Increasing interest rates to stimulate aggregate supply

    3. Increasing money supply  to stimulate aggregate demand

    4. Increasing money supply  to stimulate aggregate supply

The Federal Reserve expands the money supply by 5 percent:

a. Use the theory of liquidity preference to illustrate in a graph the impact of this policy on the interest rate.
b. Use the model of aggregate demand and aggregate supply to illustrate the impact of this change
in the interest rate on output and the price level in the short run.
c. When the economy makes the transition from its short-run equilibrium to its new long-run equilibrium, what will happen to the price level?
d. How will this change in the price level affect the demand for money and the equilibrium interest rate?
e. Is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

1. Suppose banks install automatic teller machines on every blockand, by making cash readily available, reduce the amount of moneypeople want to hold.

a. Assume the Fed does not change the money supply. According tothe theory of liquidity preference, what happens to the interestrate? What happens to aggregate demand?

b. If the Fed wants to stabilize aggregate demand, how should itrespond?