Chapter all: The Influence of Monetary and Fiscal Policy on Aggregate Demand

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ECO102H1 Full Course Notes

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The influence of monetary and fiscal policy on aggregate. The wealth effect: the change in spending that accompanies a change in perceived wealth. The interest-rate effect: the impact of a rise in the cost of borrowing on production costs due to price inflation within an economy. The exchange-rate effect: when a lower price level reduces the interest rate, investors move some of their funds overseas in search of higher returns. Theory of liquidity preference: a theory that the interest rate adjusts to bring money supply and money demand into balance: money supply: the quantity of money supplied is the same, regardless of the prevailing interest rate. This figure represents a fixed money supply with a vertical supply curve: money demand: interest rate is the opportunity cost of holding money, equilibrium in the money market. Equilibrium interest rate: the quantity of money demanded exactly balances the quantity of money supplied.

Related Questions

Question 1. (0.1 pt) According to the wealth effect, a higher price level will (decrease, increase)

the number of goods and services demanded. (Circle the correct answer for each.)

Question 2. (0.2 pt) If the central bank wants to expand aggregate demand, it can (decrease, increase)

the money supply, which would (decrease, increase) the interest rate.

(Circle the correct answer for each.)

Question 3. (0.2 pt) Monetary policy that contracts the money supply, will (decrease, increase) the

interest rate causing the aggregate demand curve to shift (in, out).

(Circle the correct answer for each.)

Question 4. (0.7 pt) The Federal Reserve contracts the money supply by 5 percent.

(Make sure to label your axes.)

a. ) Use the supply of money and the demand for money diagram to illustrate 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.

Question 5 . (0.8 pt) Explain how each of the following developments would affect the supply of money,

the demand for money, and the interest rate. Illustrate your answers with diagrams.

(Make sure to label your axes.)

a. ) The Fed's bond traders sell bonds in open-market operations.

b. ) An increase in credit-card availability reduces the cash people hold.

c. ) The Federal Reserve reduces banks' reserve requirements.

d. ) Households decide to hold more money to use for holiday shopping.

apricotantelope345

Please answer all 3 thank you!!

46. Other things being equal, an increase in the supply of money

a. increases the price level.

b. reduces aggregate demand.

c. generate significant changes in relative prices.

d. reduces the amount of money balances.

47. As global financial markets become more intertwined, the Fed has

	a. more control over fiscal policy.
	b. less control over monetary policy.
	c. more control over monetary policy.
	d. less control over fiscal policy.

48. According to the quantity theory of money,

	a. the velocity of money is the least stable factor in the monetary analysis.
	b. a change in the money supply can lead only to a proportionate change in the price level.
	c. price level changes can best be explained by Keynesian analysis.
	d. the rate of inflation is not related to changes in the money supply.

whitewildebeest237

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?

ceruleanpig915

Chapter all: The Influence of Monetary and Fiscal Policy on Aggregate Demand

ECO102H1 Full Course Notes

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