ECON 202 Lecture Notes - Lecture 10: Irrational Exuberance, Fiscal Multiplier, Open Market Operation
Document Summary
The influence of monetary and fiscal policy on aggregate. Monetary and fiscal policies can each influence aggregate demand and might lead to short run fluctuations in output and prices. Recall that money supply in the us economy is controlled by the federal reserve. As we discussed earlier, the fed can change the money supply using the following tools: Discount rate (at which the other banks can borrow reserves from the fed) Money supply is vertical because it is fixed by the fed"s policy and does not depend on the interest rate. Money demand reflects how much wealth people want to hold in liquid form (rather than in assets that pay interest but are not as liquid like bonds). A household"s money demand reflects its preference for liquidity. The money demand curve is downward sloping because there is an inverse relationship between quantity of money demanded and the interest rate: