Copyright © 2011 Cengage Learning 35 The Influence of Monetary and Fiscal Policy on Aggregate...
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Copyright © 2011 Cengage Learning 35 35 The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Transcript of Copyright © 2011 Cengage Learning 35 The Influence of Monetary and Fiscal Policy on Aggregate...
Copyright © 2011 Cengage Learning
3535The Influence of Monetary and Fiscal Policy on Aggregate
Demand
Figure 1 Equilibrium in the Money Market
Quantity ofmoney
Interestrate
0
Moneydemand
Quantity fixedby the central bank
Moneysupply
r2
M2dMd
r1
Equilibriuminterest
rate
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Figure 2 The Money Market and the Slope of the Aggregate Demand Curve
Quantityof money
Quantity fixedby the central bank
0
Interestrate
Money demand at price level P2 , MD2
Money demand atprice level P , MD
Moneysupply
(a) The money market (b) The aggregate demand curve
3. . . . whichincreasesthe equilibriuminterestrate . . .
2. . . . increases thedemand for money . . .
Quantityof output
0
Pricelevel
Aggregatedemand
P2
Y2 Y
P
4. . . . which in turn reduces the quantityof goods and services demanded.
1. Anincreasein thepricelevel . . .
r
r2
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Figure 3 A Monetary Injection
MS2Moneysupply, MS
Aggregatedemand, AD
YY
P
Money demand at price level P
AD2
Quantityof money
0
Interestrate
r
r2
(a) The money market (b) The aggregate demand curve
Quantityof output
0
Pricelevel
3. . . . which increases the quantity of goods and services demanded at a given price level.
2. . . . theequilibriuminterest ratefalls . . .
1. When the centralbank increases themoney supply . . .
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Copyright © 2010 Cengage Learning
Figure 4 FTSE 100 Index, Opening Prices 2000–09
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Copyright © 2010 Cengage Learning
Figure 5 Bank of England Base Rate, 2000–09
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Figure 6 The Crowding-out Effect
Quantityof money
Quantity fixedby the central bank
0
Interestrate
r
Money demand, MD
Moneysupply
(a) The money market
3. . . . whichincreasestheequilibriuminterestrate . . .
2. . . . the increase inspending increasesmoney demand . . .
MD2
Quantityof output
0
Pricelevel
Aggregate demand, AD1
(b) The shift in aggregate demand
4. . . . which in turnpartly offsets theinitial increase inaggregate demand.
AD2
AD3
1. When an increase in government purchases increases aggregatedemand . . .
r2
£10 billion
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Copyright © 2010 Cengage Learning
Figure 8 South Africa’s Annualized Growth Rate
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