Textbook Notes (369,036)
Canada (162,360)
Economics (923)
ECN 204 (282)
Eric Kam (28)
Chapter 15

Chapter 15 - The Influence of Monetary and Fiscal Policy on Aggregate Demand

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ECN 204
Eric Kam

thWednesday March 28 2012 Chapter 15 The Influence of Monetary and Fiscal Policy on Aggregate Demand Aggregate Demand Recall the AD curve slopes downward for three reasonsThe wealth effectThe interestrate effectThe exchangerate effect Supplydemand model that helps explain the interestrate effect and how monetary policy affects aggregate demand the wealth effect is less important because money holdings are only a small part of household wealth exchange rate effect is less important because imports and exports are a relatively small percentage of GDPTheory of Liquidity Preference A simple theory of the interest rate denoted r r adjusts to balance supply and demandfor money Money supplyassume fixed by central bank does not depend on interest rate Money demand reflects how much wealth people want to hold in liquid form for example suppose household wealth includes only two assetsMoneyliquid but pays no interestBondspay interest but not as liquid
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