Exam 16: 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

When the central bank has lowered or raised interest rates, this occurs only because the central bank's bond traders are

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.

The response of monetary policy to a change in fiscal policy is an example of a more general phenomenon: the use of _______________ to steady aggregate demand and, as a result, production and employment.

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

According to the theory of liquidity preference, if the interest rate is below the equilibrium level, the quantity of money people want to hold is more than the quantity the central bank has created, and this shortage of money puts upward pressure on the interest rate.

Although many factors determine the quantity of money demanded, the one emphasized by the theory of liquidity preference is the interest rate.

An increase in the interest rate raises the opportunity cost of holding money.There is an incentive, therefore, for people to exchange cash holdings for interest bearing deposits and this, as a result

When the government cuts spending, aggregate demand will fall, this will depress production and employment in the short run

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

Explain how a transfer payment like the unemployment insurance benefit acts as an automatic stabilizer.

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

If a country's central bank contracts the money supply, the aggregate demand curve shifts to the left.

A monetary expansion would reduce interest rates, stimulate investment spending and

In addition to the multiplier and crowding out effects, a tax change is a determinant of the size of the shift in the aggregate demand curve.Why would perceptions about whether the tax change is permanent or temporary affect the size of the shift?

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

Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

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

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