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EC140 Chapter Notes - Chapter 15: Autarky, Canadian Dollar, Fiscal Multiplier

Ch 15 - the influence of monetary and fiscal policy on aggregate demand. The theory of liquidity preference - keynes"s theory that the interest rate adjusts to bring money supply and money demand into balance. Flexible exchange rate - a policy by which the value of the exchange rate is allowed to vary without interference by the central bank. In a small economy with a flexible exchange rate, a monetary injection by the bank of canada causes the dollar to depreciate in value. This causes an increases in the demand for canadian- produced goods and services that is not realized in a closed economy. In the end, a monetary injection(more money in the economy) in an open economy shifts the aggregate-demand curve further to the right than it does in a closed economy. Fixed exchange rate - a policy by which the value of the exchange rate is held fixed by the central bank.

Canada

Introduction to Macroeconomics

Economics

Angela Trimarchi

Wilfrid Laurier University

Public Policy Analysis

Introduction to Women and Gender Studies

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?

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?

In the long run the interest rate adjusts to adjusts to balance the supply and demand for loanable funds. In the short run, the interest rate adjusts to balance the supply and demand for money. Discuss.

EC140 Chapter Notes - Chapter 15: Autarky, Canadian Dollar, Fiscal Multiplier

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