ECN 204 Chapter 15: Chapter 15 - The Influence of Monetary and Fiscal Policy on Aggregate Demand
Document Summary
The influence of monetary and fiscal policy on aggregate demand. Recall, the ad curve slopes downward for three reasons: Supply-demand model that helps explain the interest-rate 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. A 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 example, suppose household wealth includes only two assets: Money liquid but pays no interest. Bonds pay interest but not as liquid. A household"s money demand reflects its preference for liquidity.
