Chapter 34 mindmap Kinh tế vĩ mô

The Influence of Monetary and
Fiscal Policy on Aggregate Demand

How Monetary Policy influences
Aggregate Demand

How Fiscal Policy influences Aggregate Demand

Using Policy to stabilize the Economy

CHANGES in
The aggregatedemand curve is
downward sloping
for 3 reasons

Liquidity preference:
- Interest Rate
- Money Supply
- Money Demand

Changes in Money Supply

The role of Interest rate Targets in Fed Policy
Governement Purchases
2 effects cause size of the shift in AD curve

Federal Funds Rate: short-term
Wealth effect

Interest Rate effect

Exchange Rate effect

Money Supply

Money Demand

Equilibrium in the Money Market
Multiplier effect

Because the Fed can control
the size of the money supply
directly, the quantity of
money supplied does not
depend on any other
economic variables,
including the interest rate.
Thus, the supply of money is
represented by a vertical
supply curve.

The Interest Rate
rises, the quantity
of money
demanded will fall.
=> the demand for
money will be
downward sloping

Taxes

The Interest Rate
adjusts to bring money
supply and money
demand into balance

The additional shifts in
aggregate demand that
result when expansionary
fiscal policy increases
income and thereby
increases consumer
spending

If the interest rate > the equilibrium
interest rate, the quantity of money that
people want to hold < the quantity that the Fed
has supplied. => This surplus of money put
downward pressure on the Interest Rates.

Monetary injection by the Fed increases the money supply, leading to a
lower interest rate, and a larger quantity of goods and services demanded.

Crowding-out effect

1/(1-MPC)

The offset in aggregate
demand that results
when expansionary fiscal
policy raises the

interest rate and
thereby reduces
investment spending.

MD increase => I.R increase
=> I decrease => AD decrease

Government cuts Personal Income Tax
=> Changes in taxes affect a
household’s take-home pay.

Automatic stabilizers:
changes in fiscal policy that
stimulate aggregate demand
when the economy goes into
a recession but that occur
without policymakers having
to take any deliberate action.