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ECON-UA 1 Chapter Notes - Chapter 21: Government Spending, Aggregate Demand, Fiscal Policy

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School
New York University
Department
Economics
Course
ECON-UA 1
Professor
Edward Steinberg

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Document Summary

Chapter 21 - the influence of monetary and fiscal policy on aggregate demand. To achieve its macroeconomic goals of maximum employment and stable prices, the. Fed can use monetary policy to shift the ad curve. Changing the money supply by targeting interest rates. By reducing the money supply, the fed increases the equilibrium interest rate. Higher interest rate increases the cost of borrowing and decreases the demand for loanable funds. Investment portion of aggregate demand falls - ad shifts left. The fed can increase interest rate by reducing the money supply. Higher interest rate discourages investments and shifts ad to the left. A situation where the interest rate is close to zero. Monetary policy may not work since nominal interest rates cannot be reduced further. Fed can lower rates on assets (mortgages, debt) The setting of the level of government spending and taxation by govt policymakers.

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Related Questions

Question 16 (3 points) An expansionary monetary policy by the Fed should lead to: 

A decrease in investment and a decrease in aggregate demand. Leave investment unchanged but decrease aggregate demand.

An increase in investment and an increase in aggregate demand.

An increase in investment and a decrease in aggregate demand.

 

Question 17 (3 points) Federal Reserve policy may have little impact on aggregate demand if:

Exchange rates do not respond to a change in market interest rates.

Investment by firms fails to respond to lower interest rates.

Banks meet their reserve requirements.

People fail to spend the extra money they receive when the Fed cuts taxes.

 

Question 18 (3 points) A liquidity trap is said to exist when a change in monetary policy has no effect on:

The supply of government bonds.

The natural level of employment

Aggregate supply.

Interest rates.

 

Question 19 (3 points) Because of the problem of lags, monetary authorities should probably respond to conditions:

Expected to exist in the future.

Immediately as they arise.

In the recent past.

Based on past statistics.

(Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.

a. Should the Fed increase or decrease the money supply?

b. If the Fed uses open-market operations, should it buy or sell government securities?

c. 10. Determine whether each of the following increases decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP.

(Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.
a. Should the Fed increase or decrease the money supply?
b. If the Fed uses open-market operations, should it buy or sell government securities?
c. 10. Determine whether each of the following increases decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP