Exam 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

In 2009, Professor Mankiw wrote an article in the New York Times suggesting negative interest rates. The logic is that consumers would spend more money. The additional spending would:

The equilibrium interest rate occurs in the money market where the:

When the central bank contracts the money supply, the interest rate rises to bring the money market into equilibrium and reduces the quantity of goods and services demanded for any given price level. This:

An increase in the interest rate reduces the quantity of goods and services demanded, because borrowing is less expensive.

Keynes thought that the behaviour of the economy in the short run was influenced by what he called "animal spirits." By this he meant that business people sometimes felt good about the economy, and carried out lots of investment, and at other times felt bad about the economy, and so cut back on their investment spending. Explain how such fluctuations in investment would lead to fluctuations in real GDP and prices.

The crowding-out effect is caused by

The equilibrium interest rate is the rate at which the quantity of money demanded exactly balances the quantity of money supplied.

More reflective of current central bank policy is to treat the money supply, rather than the interest rate, as its policy instrument.

As the interest rate falls, people become more willing to hold money until, at the equilibrium interest rate, people are happy:

Different theories of the interest rate are useful for different purposes. When thinking about the short-run determinants of interest rates, it is best to keep in mind:

If asset markets are driven by the "animal spirits" of investors, then

A tax change is a determinant of the size of the shift in the aggregate demand curve. The shift in aggregate demand curve will be affected by

Suppose that the government spends more on replacing old school buildings with new ones. What does this do to aggregate demand? Please cite the presence of the multiplier effect, the crowding-out effect and taxes.

John Maynard Keynes's liquidity preference theory suggests that the interest rate is determined by:

Briefly discuss the theory of liquidity preference.

What is the difference between monetary policy and fiscal policy?

Different theories of the interest rate are useful for different purposes. When thinking about the long-run determinants of interest rates, it is best to keep in mind:

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Explain why the interest rate is the opportunity cost of holding currency. What is the benefit of holding currency?

The multiplier effect means that aggregate demand curve will shift by a larger amount than the increase in _____________.