2. 2
What we have learned
in macroeconomics
Chap 25
Chap 26
Chap 27
Chap 28
Chap 29
Chap 30
The level and growth of productivity and real GDP
How the financial system works and
How the real interest rate adjusts to balance
saving and investment
Why there is always some unemployment
in the economy
The monetary system and how changes inthe money
supply affect the price level,the inflation rate, and
the nominal interest rate
Chap 31
Chap 32
Extention of this analysis to open economies to explain
the trade balance and the exchange rate.
GDP
Financial
system
Unemployment
Monetary
system
Open
Economy
Chapter
Key words
Contens
Chap 33
.Discussing some of the important facts about short run
fluctuations in economic activity and introducing a basic
model to explain those fluctuations.
Aggregate demand
and aggregate supply
3. 3
Index
1. How monetary policy influences aggregate demand
2. How fiscal policy influences aggregate demand
3. Using policy to stabilize the economy
4. 4
Index
1. How monetary policy influences aggregate demand
2. How fiscal policy influences aggregate demand
3. Using policy to stabilize the economy
5. 5
Why the aggregate-demand curve
slopes down
quantity of output
Price
level
• The price level and consumption:The wealth effect
– Consumers are wealthier,which stimulates the demand for consumption goods.
• The price level and investment:The interest rate effect
– Interest rates fall,the demand for investment goods.
• The price level and net exports:The exchange rate effect
– The currency depreciates,which stimulates the demand for net exports.
Y=C+I+G+NX
The most important
reasons for the
demand slope of the
aggregate demand
curve
7. 7
Equilibrium in the money market
interest
rate
Quantity of money
money supply
money demand
Money supply
Money demand
Equilibrium in
the money market
・The Feds alters the money supply primarily by changing the quantity of
reserves in the banking system through the purchase and sale of government
bonds in open market operations.
・People choose to hold money instead of other assets that offer higher rates of
return because money can be used to buy goods and services.
・Interest rate is the opportunity costs of holding money.
・The interest rate adjusts to balance the supply and demand for money.
・There is one interst rate,called the equilibrium interest rate, at which the
quantity of money demanded exactly balances the quantity of money supplied.
8. 8
1) A higher price level raises money demand.
2) Higher money demand leads to a higher interest rate.
3) A higher interest rate reduces the quantity of goods and serveices demanded.
The money market
The Aggregate demadn curve
interest
rate
Quantity of money
Price
Level
Quantity of Output
r2
r1
P2
P1
Money
supply
money demand
aggregate demand
9. 9
Change in the money supply
When the Fed increases the money supply,it lowers the interest rate and increase
the quantity of goods and services demanded for any given price level,shifting the
aggregate demand curve to the right.
The money market
The Aggregate demadn curve
interest
rate
Quantity of money
Price
Level
Quantity of Output
r2
r1
P2
P1
Money
supply
Money demand
aggregate demand
Y1
Y2
10. 10
The role of interest rate targets in Fed policy
• Discussion of Fed policy often treat the interest rate,rather than the
money supply,as the Fed's instrument.
• There are several related reasons for the Fed's decisions to use the
federal funds rate,rather than for the money supply.
– The money supply is hard to measure with sufficient precision.
– Money demand fluctuates over time.
– For any given money supply,fluctuations in money demand would lead to
fluctuations in interest rates,aggregate demand, and output.
• The theory of liquidity preference illustrates an important principle:
– Monetary policy can be described either in terms of the money supply or in
termas of the interest rate.
11. 11
Index
1. How monetary policy influences aggregate demand
2. How fiscal policy influences aggregate demand
3. Using policy to stabilize the economy
12. 12
Shifting the aggregate demand
indirectly and directly
Monetary Policy
Fiscal Policy
・Using interest controls,policy makers(The Fed) shift
the aggregate demand curve indirectly by influencing
the spending decisions of firms or house holds.
When government alters its own purchases of goods
and services,it shifts the aggregate demand curve
directly.
-The multiplier effect
-The crowding out effect
13. 13
The multiplier effect
The Aggregate demadn curve
Price
Level
Quantity of Output
Aggregate demand
An increase in
government
purchases of $20
billion initially
increases aggregate
demand by$20
billion.
But the multiplier
effect can amplify
the shift in
aggregate demand.
• Mulitiplier effect is the addtional shifts in aggregate demand that result when
expansionary fiscal policy increases income and thereby increases consumer spending.
• Higher govenrment demand spurs higher demand for investment goods.This positive
feedback from demand to investment is sometimes called the investment accelerator.
15. 15
Other application of the multiplier effect
Y=C + I + G + NX
A small initial change in consumption,investment,government
purchases,or net exports can end up having a large effect on
aggregate demand and ,therefore, the economy's production of goods
and services.
-Recession overseas
-Stock boom
-Financial crisis
16. 16
The crowding out effect
The money market
The Aggregate demadn curve
Quantity of money
Price
Level
Quantity of Output
r2
r1
Money
supply
Money demand
aggregate demand
interest
rate
3 which increase
the equilibrium
interest rate
2. the increase in
spending increases
money demand
1 When an increaes in
government purchase
increases aggregate
demand
4 which in turn partly
offsets the initial increase
in aggregate demand.
• Crowding effect is the offset in aggregate demand that results when expansinaory
fiscal policy raises the interest rate and thereby reduces investment spending.
17. 17
Changes in taxes
• A tax decrease increases consumer spending,the tax cut
shifts the aggregate demand curve to the right.
• The size of the shift in aggregate demand resulting from a
tax change is affected by the multiplier and crowding out
effects.
• The effect of tax change depends on whether permanent or
temporary.
– Permanent:
House hold increase their spending by a large amount.
– Temporary:
House hold increase their spending by only a small amount.
18. 18
Index
1. How monetary policy influences aggregate demand
2. How fiscal policy influences aggregate demand
3. Using policy to stabilize the economy
19. 19
Should policy makers use these instruments to
control aggregate demand and stabilize the
eonomy?
20. 20
The case for active stabilization policy
• The emplyment act of 1946
– It is the continuing policy and responsibility of the federal
government to ・・・ promote full employment and production.
• The general theory of employment,interest rate and money
– Keynes claimed that the government should actively stimulate
aggregate demand when aggregate demand appeared insufficient to
maintain production at its full employment level.
• Former Fed Chairman William Mcchesney Martin
– The Federal Reserve's job is to take away the punch bowl just as
the party gets going.
21. 21
The case against active stabilization policy
• To avoid active use of monetary policy and fiscal policy to
try to stabilize the economy.
• Policy instruments should be set to acheive long-run goals
– such as rapid economic growth and low inflation.
• Both monetary and fiscal policies affect the economy with
long lag.
22. 22
Automatic stabilizers
• Automatic stabilizers are changes in fiscal policy that
stimulate aggregate demand when the economy goes into a
recession without policymakers having to take any
deliberate action.
go to
recession
workers
are laid off
income support
by government
This automatic increase in government spending stimulates aggregate at exactly the
time when aggregate demand is insufficient to maintain full employment.
