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TheInfluenceofMonetaryandFiscalPolicyonAggregateDemand34PRINCIPLESOFFOURTHEDITION0
CHAPTER34THEINFLUENCEOFMONETARYANDFISCALPOLICYInthischapter,lookfortheanswerstothesequestions:Howdoestheinterest-rateeffecthelpexplaintheslopeoftheaggregate-demandcurve?HowcanthecentralbankusemonetarypolicytoshifttheADcurve?Inwhattwowaysdoesfiscalpolicyaffectaggregatedemand?Whataretheargumentsforandagainstusingpolicytotrytostabilizetheeconomy?0
CHAPTER34THEINFLUENCEOFMONETARYANDFISCALPOLICYIntroductionEarlierchapterscovered:thelong-runeffectsoffiscalpolicy
oninterestrates,investment,economicgrowththelong-runeffectsofmonetarypolicy
onthepricelevelandinflationrateThischapterfocusesontheshort-runeffects
offiscalandmonetarypolicy,
whichworkthroughaggregatedemand.0
CHAPTER34THEINFLUENCEOFMONETARYANDFISCALPOLICYAggregateDemandRecall,theADcurveslopesdownwardforthreereasons:thewealtheffecttheinterest-rateeffecttheexchange-rateeffectNext:asupply-demandmodelthathelpsexplaintheinterest-rateeffectandhowmonetarypolicyaffectsaggregatedemand.themostimportantoftheseeffectsfortheU.S.economy0
CHAPTER34THEINFLUENCEOFMONETARYANDFISCALPOLICYTheTheoryofLiquidityPreferenceAsimpletheoryoftheinterestrate(denotedr)radjuststobalancesupplyanddemand
formoneyMoneysupply:assumefixedbycentralbank,doesnotdependoninterestrate0
CHAPTER34THEINFLUENCEOFMONETARYANDFISCALPOLICYTheTheoryofLiquidityPreferenceMoneydemandreflectshowmuchwealthpeoplewanttoholdinliquidform.Forsimplicity,supposehouseholdwealthincludesonlytwoassets:Money–liquidbutpaysnointerestBonds–payinterestbutnotasliquidAhousehold’s“moneydemand”reflectsitspreferenceforliquidity.Thevariablesthatinfluencemoneydemand:
Y,r,andP.0
CHAPTER34
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