ECO 1102 Lecture Notes - Lecture 18: Canadian Dollar, Liquidity Preference, Aggregate Demand

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The influence of monetary and fiscal policy on aggregate demand in this chapter we examine in more detail ho(cid:449) the go(cid:448)e(cid:396)(cid:374)(cid:373)e(cid:374)t"s tools of (cid:373)o(cid:374)eta(cid:396)y a(cid:374)d fiscal policy i(cid:374)flue(cid:374)ce the position of the aggregate- demand curve. We will also see how the tools of monetary and fiscal policy can shift the aggregate- demand curve and, in doing so, affect short-run economic fluctuations. How monetary policy influences aggregate demand the aggregate-demand curve slopes downward for three reasons: the wealth effect, the interest rate effect, the real exchange rate effect. The interest rate effect is the most important reason for the downward slope of the aggregate- demand curve. The theory of liquidity preference the theo(cid:396)y of li(cid:395)uidity p(cid:396)efe(cid:396)e(cid:374)ce: key(cid:374)es"s theo(cid:396)y that the interest rate adjusts to bring money supply and money demand into balance. In the analysis that follows, the expected rate of inflation is held constant.

Related Questions

In an effort to move the economy out of a recession, the federal government would engage in expansionary economic policies. Respond to the following points in your paper on the actions the government would take to address expansionary fiscal and monetary policies:

Expansionary Fiscal Policy:

Explain the actions the federal government would take while engaging in expansionary fiscal policy in terms of the following:

The necessary change in taxes and government spending,

The effect on aggregate demand, GDP, and employment.

Expansionary Monetary Policy:

The three tools the Federal Reserve Bank (The Fed) uses when conducting monetary policy are the required reserve ratio, the discount rate, and open market operations.

Explain the actions of the Fed in regard to the three tools.

When the required reserve ratio is increased or decreased

When the discount rate is increased or decreased

Buying or selling government securities when conducting expansionary monetary policy

Explain how these actions would affect the money supply, interest rates, spending, aggregate demand, GDP, and employment.

raspberrygoose799

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

8. What did pre-Keynesian believe about the market and its ability to pull itself out of a recession?

12. What are the relations between government spending, the marginal propensity to consume, the marginal propensity to save, and the multiplier effect?

13. What are some of the problems with using fiscal policy in an effective manner?

18. What is the new classical approach to the stimulatory impact of fiscal policy implemented through deficit spending?

22. What approach to the money supply do those embracing monetarism suggest?

24. How do shifting price levels impact debtors and savers?

25. Can you use aggregate demand/ aggregate supply analysis to understand and explain the impact of a tax cut?

26. Can you use aggregate demand/ aggregate supply analysis to understand and explain the impact of a tax increase?

27. Can you use aggregate demand/aggregate supply analysis to understand and explain the impact of an increase in government spending?

28. Can you use aggregate demand/aggregate supply analysis to understand and explain the impact of a cut in government spending?

29. Can you use aggregate demand/aggregate supply analysis to understand and explain the impact of an expansionary monetary policy?

30. Can you use aggregate demand/ aggregate supply analysis to understand and explain the impact of a restrictive monetary policy?

32. How does a deficit and large debt influence the economy?

33. What is the relationship between the expansion of the money supply and inflation?

35. How do expectations impact the effectiveness of monetary policy?

36. What restricts the ability of the Fed to purchase U.S. securities?

39. What is the impact of higher interest rates on the value of a currency and a nation%u2019s net exports?

41. Why do countries willing lend the U.S. government money despite the relatively large debt to GDP ratio of the United States?

42. How does trade contribute to growth?

44. How does the relative size of government contribute to growth?

47. Do High Income countries always grow at a faster pace than lesser developed countries?

48. How do high levels of inflation effect growth?

49. Can you identify the amount of growth in an economy by using the percentage change formula?

50. What countries are presently experiencing high rates of economic growth?

amethystgerbil16

ECO 1102 Lecture Notes - Lecture 18: Canadian Dollar, Liquidity Preference, Aggregate Demand

ECO 1102 Full Course Notes

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