ECON-UA 1 Chapter Notes - Chapter 21: Government Spending, Aggregate Demand, Fiscal Policy
Document Summary
Chapter 21 - the influence of monetary and fiscal policy on aggregate demand. To achieve its macroeconomic goals of maximum employment and stable prices, the. Fed can use monetary policy to shift the ad curve. Changing the money supply by targeting interest rates. By reducing the money supply, the fed increases the equilibrium interest rate. Higher interest rate increases the cost of borrowing and decreases the demand for loanable funds. Investment portion of aggregate demand falls - ad shifts left. The fed can increase interest rate by reducing the money supply. Higher interest rate discourages investments and shifts ad to the left. A situation where the interest rate is close to zero. Monetary policy may not work since nominal interest rates cannot be reduced further. Fed can lower rates on assets (mortgages, debt) The setting of the level of government spending and taxation by govt policymakers.