ECON 102 Chapter Notes - Chapter 21: Nominal Interest Rate, Real Interest Rate, Aggregate Demand

• School: U of M
• Department: Economics
• Course: ECON 102
• Professor: Edward Cho

Document Summary

Ho(cid:449) the go(cid:448)e(cid:396)(cid:374)(cid:373)e(cid:374)t"s poli(cid:272)(cid:455) tools i(cid:374)flue(cid:374)(cid:272)e the positio(cid:374) of the agg(cid:396)egate de(cid:373)a(cid:374)d (cid:272)u(cid:396)(cid:448)e. Higher real wealth stimulate consumer spending and thus increases the quantity of goods and services demanded: the interest rate effect: a lower price level reduces the amount of money people want to hold. As people try to lend out their excess money holdings, the interest rate falls. This movement of funds causes the real value of domestic currency to fall in the market for foreign currency exchange. Domestic goods become less expensive relative to foreign goods. This change in the real exchange rates stimulate spending on net exports and thus increases the quantity of goods and services demanded. Money supply money supply controlled by the federal reserve: fed sells government bonds: contract the money supply. Because the quantity of money supplied is fixed by fed policy, it does not depend on other economic variables (money supply is vertical)