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34
- 1. 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand
- 11. Figure 1 Equilibrium in the Money Market Quantity of Money Interest Rate 0 Quantity fixed by the Fed Copyright © 2004 South-Western Money demand Money supply r 2 M 2 d M d r 1 Equilibrium interest rate
- 14. Figure 2 The Money Market and the Slope of the Aggregate-Demand Curve Quantity of Money Quantity fixed by the Fed 0 Interest Rate Money supply (a) The Money Market (b) The Aggregate-Demand Curve Quantity of Output 0 Price Level Aggregate demand Copyright © 2004 South-Western Money demand at price level P 2 , MD 2 Money demand at price level P , MD 3. . . . which increases the equilibrium interest rate . . . 2. . . . increases the demand for money . . . P 2 Y 2 Y P 4. . . . which in turn reduces the quantity of goods and services demanded. 1. An increase in the price level . . . r r 2
- 16. Figure 3 A Monetary Injection Aggregate demand, A D Y Quantity of Money 0 Interest Rate (a) The Money Market (b) The Aggregate-Demand Curve Quantity of Output 0 Price Level Copyright © 2004 South-Western MS 2 Money supply, MS Y P Money demand at price level P AD 2 r r 2 3. . . . which increases the quantity of goods and services demanded at a given price level. 2. . . . the equilibrium interest rate falls . . . 1. When the Fed increases the money supply . . .
- 24. Figure 4 The Multiplier Effect Quantity of Output Price Level 0 Copyright © 2004 South-Western Aggregate demand, AD 1 $20 billion AD 2 AD 3 1. An increase in government purchases of $20 billion initially increases aggregate demand by $20 billion . . . 2. . . . but the multiplier effect can amplify the shift in aggregate demand.
- 29. Figure 5 The Crowding-Out Effect Quantity of Money Quantity fixed by the Fed 0 Interest Rate Money demand, MD Money supply (a) The Money Market Quantity of Output 0 Price Level Aggregate demand, AD 1 (b) The Shift in Aggregate Demand Copyright © 2004 South-Western r 3. . . . which increases the equilibrium interest rate . . . 2. . . . the increase in spending increases money demand . . . M D 2 4. . . . which in turn partly offsets the initial increase in aggregate demand. AD 2 AD 3 1. When an increase in government purchases increases aggregate demand . . . r 2 $20 billion