Académique Documents
Professionnel Documents
Culture Documents
on Aggregate Demand
Group 7
Nguyễn Thị Thùy Dương
VŨ Thị Diệu Huyền
Nguyễn Thị Tâm
Nguyễn Phương Linh
Nguyễn Mậu Duy
Nguyễn Thị Kim Anh
Yana Tumash
Monetary Policy Influences Aggregate Demand
Keynes’s theory
Interest rate adjusts:
To bring money supply and money demand into bala
nce
Nominal interest rate
Real interest rate
Monetary Policy Influences Aggregate Demand
The theory of liquidity preference
Money supply
- Controlled by the Fed
- Quantity of money supplied
Fixed by Fed policy
Doesn’t vary with interest rate
Money demand
- Money – most liquid asset
- Interest rate – opportunity cost of holding money
- Money demand curve – downward sloping
Equilibrium in the money market
- Equilibrium interest rate
- Quantity of money demanded = quantity of money sup
plied
Monetary Policy Influences Aggregate Demand
The theory of liquidity preference
If interest rate > equilibrium If interest rate <equilibrium
Money demand at
r1 P1
price level P2, MD2
Aggregate
Money demand at
demand
price level P1, MD1
An increase in the price level from P1 to P2 shifts the money-demand curve to the right, as in panel (a). This incr
ease in money demand causes the interest rate to rise from r1 to r2. Because the interest rate is the cost of borr
owing, the increase in the interest rate reduces the quantity of goods and services demanded from Y1 to Y2. Thi
s negative relationship between the price level and quantity demanded is represented with a downward-sloping
aggregate-demand curve, as in panel (b). 8
Monetary Policy Influences Aggregate Demand
Changes in the money supply
Aggregate-demand curve shifts
- Quantity of goods and services demanded changesFor a g
iven price level
Monetary policy
- Shifts aggregate-demand curve
Monetary policy: the Fed increases the money supply
- Money-supply curve shifts right
- Interest rate falls
- At any given price level
– Increase in quantity demanded of goods and services
- Aggregate-demand curve shifts right
9
Monetary Policy Influences Aggregate Demand
A monetary injection
(a) The Money Market (b) The Aggregate-Demand Curve
Interest Price
rate Money supply, level
MS1 MS2
1. When the Fed
increases the
r1 money supply . . .
P
r2
AD2
Money demand Aggregate
at price level P demand, AD1
0 Quantity 0 Y1 Y2 Quantity of output
2. . . . the equilibrium of money 3. . . . which increases the quantity of goods and
interest rate falls . . . services demanded at a given price level.
In panel (a), an increase in the money supply from MS1 to MS2 reduces the equilibrium interest r
ate from r1 to r2. Because the interest rate is the cost of borrowing, the fall in the interest rate rai
ses the quantity of goods and services demanded at a given price level from Y1 to Y2. Thus, in p
anel (b), the aggregate-demand curve shifts to the right from AD1 to AD2. 10
Monetary Policy Influences Aggregate Demand