ECON102 Chapter Notes - Chapter 15: Aggregate Demand, Monetary Policy, Open Market Operation

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21 Sep 2016

School

University of Alberta

Department

Economics

Course

ECON102

Professor

Andrew Wong

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ECON102 Full Course Notes

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Chapter 15 the influence of monetary and fiscal. Earlier chapters covered: the long-run effects of fiscal policy on interest rates, investment, economic growth the long-run effects of monetary policy on the price level and inflation rate. This chapter focuses on the short-run effects of fiscal and monetary policy, which work through aggregate demand. Recall, the ad curve slopes downward for three reasons: The interest-rate effect [the most important of these effects for the economy] A supply-demand model that helps explain the interest-rate effect and how monetary policy affects aggregate demand. A simple theory of the interest rate (denoted r) R adjusts to balance supply and demand for money. Money supply: assume fixed by central bank, does not depend on interest rate. Money demand reflects how much wealth people want to hold in liquid form. For simplicity, suppose household wealth includes only two assets: Bonds pay interest but not as liquid. A household"s money demand reflects its preference for liquidity.

Related Questions

Assume an economy is closed. According to classical economic theory, explain what will be the long-run effects of an increase in taxes. You may want to organize your answer around these three parts:

A) Aggregate Supply/Output (includes a discussion of the determinant of the level of output and the effect of fiscal policy on output in the long-run

B) Aggregate Demand/Real expenditures (includes a discussion of components of expenditures, their determinants, and the effect of fiscal policy on expenditures and the composition of expenditures).

C) Loanable Funds Markets (includes a discussion of the determinant of the interest rate in the loanable funds market and the effect of the fiscal policy on the real interest rate in the long run). Please include a graph if possible.

skyfrog367

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

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

ECON102 Chapter Notes - Chapter 15: Aggregate Demand, Monetary Policy, Open Market Operation

ECON102 Full Course Notes

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