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Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
Eco 202 ch 35 monetary fiscal aggregate demand
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Eco 202 ch 35 monetary fiscal aggregate demand

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  1. Chapter 35Monetary PolicyFiscal PolicyandAggregate Demand
  2. Key Termstheory of liquidity preferencefiscal policesmultiplier effectcrowding-out effectautomatic stabilizers
  3. Economic Cycle
  4. Aggregate DemandWealth EffectInterest-Rate EffectExchange-Rate Effect
  5. John Maynard Keynes(1883 - 1946)Father of MacroeconomicsThe GeneralTheory ofEmployment,Interest and MoneyThe ideas of economists and politicalphilosophers are more powerful thancommonly understood; indeed theworld is ruled by little else.
  6. Theory of LiquidityPreferenceInterest rates adjust tobring money supply andmoney demanded intobalance
  7. Interest RatesNominal = Real + InflationIf inflation is zero, thennominal = real
  8. Money SupplyDiscount RateBond MarketReserve Ratio
  9. InterestRateQuantity of MoneyMD1Money MarketMD2r1r2MoneySupplyMoneyDemandQuantity fixedby the CentralBankEquilibriumInterestRate
  10. Liquidity Theory1. Money Supply is fixed by central bank withpolicy tools (Debt Instrument Market, DiscountRate, Reserve Requirement)2. Money Demand - Liquidity - Interest rate isthe opportunity cost of holding money.3. Equilibrium pressures
  11. InterestRateQuantity of MoneyMoney Marketr2MoneySupplyMoneyDemandQuantity fixedby the CentralBankr1r3
  12. MoneyDemandInterestRateQuantity of MoneyMoney Marketr2MoneySupplyQuantity fixedby the CentralBankr1r3
  13. MoneyDemandInterestRateQuantity of MoneyMoney Marketr2MoneySupplyr1r3
  14. InterestRate1. Price level increases2. Increases demand for money3. Increases interest rate4. Reduces quantity demand of outputMoney Marketr2MoneySupplyMoneyDemandQuantityfixed by theCentral Bankr1PriceLevelP2AggregateDemandOutputY2P1Y1Aggregate Demand
  15. Fiscal PoliciesLevel of governmentspending and taxing
  16. Multiplier EffectAdditional shifts inaggregate demand due toexpansionary governmentspending
  17. Marginal Propensity to ConsumeMPCNew income = spend + saveHow much do you spend?75 percentThen you will be saving 25 percent
  18. Marginal Propensity to ConsumeplusMarginal Propensity to Saveequals oneMPC + MPS = 11- MPS = MPC1- MPC = MPS
  19. Earn Spend Total Spending1 100.0 75.0 75.02 75.0 56.3 131.33 56.3 42.2 173.44 42.2 31.6 205.15 31.6 23.7 228.86 23.7 17.8 246.67 17.8 13.3 260.08 13.3 10.0 270.09 10.0 7.5 277.510 7.5 5.6 283.111 5.6 4.2 287.3Multiplier1/(1-MPC)Remember1-MPC = MPSThereforeMultiplieralso1/MPS
  20. MPC MPS Total Spending1.00 0.00 infinite0.90 0.10 10.000.80 0.20 5.000.75 0.25 4.000.60 0.40 2.500.50 0.50 2.000.40 0.60 1.670.30 0.70 1.430.25 0.75 1.330.10 0.90 1.110.50 0.50 2.00Multiplier1/(1-MPC)Remember1-MPC = MPSThereforeMultiplieralso1/MPS
  21. Multiplier Effect1.Works with C, I, G, andNX2. Goes both ways
  22. Where does the moneycome from?TaxBorrowPrintReduces IncomeIncreases interestInflation
  23. Crowding-Out can belarger than theMultiplierAggregate Demand shiftsleft
  24. Crowding-out EffectOffsetting aggregatedemand when fiscalexpansion raises interestrates and reduces spending
  25. Automatic StabilizersChanges in fiscal policy thatstimulate aggregate demandwhen the economy goesinto a recession

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