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ECON 351 (21)
Chapter 17

Chapter 17_Monetary Theory I.docx

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Department
Economics
Course
ECON 351
Professor
Frank Sorokach
Semester
Fall

Description
Chapter 17: Monetary Theory I: The Aggregate Demand and Aggregate Supply Model  Monetary Policy – implemented by a central bank and objectives such as price stability, full employment, and stable economic growth  Fiscal Policy - tax and spending policies of the federal government and decisions determined by Congress where the Federal Reserve plays no role  Sticky Price - The resistance of a price (or set of prices) to change, despite changes in the broad economy that suggest a different price is optimal. Some firms will try to keep prices constant as a business strategy, even though it is not sustainable based on material costs, labor, etc.  Aggregate Expenditure – the economy’s output of goods and services equals the sum of : • C + I + G + NX = GDP 1. Consumption – spending by households on goods and services 2. Investment – planned spending by firms on capital goods such as factories, office buildings, machine tools and by households on new homes 3. Government – local, state, and federal government purchase of goods and services such as military vehicles, police cars, and government properties 4. Net Export – spending by foreign firms and households on goods/services produced in U.S. minus spending by U.S. firms and households on goods/services produced in other countries  Aggregate Demand Curve - An increase in the price level reduces the supply of real balances, shifting to the left from (M/P)1 TO (M/P)2, thus increasing the interest rate from I1 to I2.An increase in the interest rate makes firms to reduce investment in plants and equipment and gives consumers an incentive to save rather than to spend money. - A decrease in the price level increase the supply of real balanc
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