23115 Lecture Notes - Lecture 7: Net Income, Open Economy, Money Supply
Document Summary
The influence of monetary and fiscal policy on demand & Open-economy macroeconomics: monetary policy and aggregate demand. Interest-rate effect more important in explaining the downward slope. Wealth effect less important as $ holdings is small % of household wealth. *higher inflation rate induces rba to increase interest rates. * higher interest rate higher cost of borrowing higher return on saving less investment less consumption by households more savings. *changes in cash rate induced by changes in inflation rate moves up/down the ad curve. E. g. reduction in interest rate loosening monetary policy qd increases. The interest rate adjusts to balance the supply of and demand for money. Cash rate is used by rba as monetary policy instrument. *money supply doesn"t depend on interest rate *liquidity of money explains demand for money. People choose to hold money instead of other assets because money can be used to buy goods and services. * higher interest rate = higher opportunity cost.
