Aggregate demand policies, Macroeconomics

Assignment Help:

Aggregate Demand Policies

Both fiscal and monetary policy changes shift the AD curve. Let us see how, starting with a fiscal expansion. See figure 6.2. In the upper panel, the initial LM and IS schedules correspond to a given nominal quantity of money and the price level P0. The equilibrium is at point E and there is a corresponding point on the AD schedule in the lower panel. When there is a fiscal expansion, the IS schedule shifts outward and to the right. At the initial price level there is a new equilibrium at point Elwith higher interest rates and higher level of income - and spending. Thus at the initial level of prices, P0, equilibrium income and spending are now higher. This is shown by plotting point El in the lower panel. Point El is a point on the new aggregate demand curve ADl. Doing a similar exercise at other points on the original AD leads us to the derivation of the new aggregate demand curve ADl. We see that the aggregate demand curve has shifted to the right because of fiscal expansion. A fiscal contraction produces the opposite result.

Figure 1

2401_aggregate demand policies.png

Now, let us study the effect of change in monetary policy on the aggregate demand curve. See figure 6.3. An increase in the nominal stock of money implies a higher real money stock at each level of prices and thus shifts the LM curve to LMl in the upper panel.

The equilibrium level of income rises from Y0 to Yl at the initial price level, P0. Correspondingly, the AD curve moves out to the right, to ADl, with point El in the lower panel corresponding to El in the upper panel. The AD curve shifts up in exactly the same proportion as the increase in the money stock. For instance, at point K the price level, Pl, is higher than P0 in the same proportion that the money supply has increased. Real balances at K and ADl are therefore the same as at E on AD.

Figure 2


534_aggregate demand policies1.png


Related Discussions:- Aggregate demand policies

Determination of gdp in the cross model, Q. Determination of GDP in the cro...

Q. Determination of GDP in the cross model? In the cross model, GDP is determined as the solution to the equation Y D (Y) = Y We may explain

Answer for questions, How can we answer in Economic terms this questions: W...

How can we answer in Economic terms this questions: Why should the government consider to increase tax on cigarette

Money, nature, development and function of money.

nature, development and function of money.

The growth of per-capita gdp in the period immediately, An economy has the ...

An economy has the following parameter values: s ?=.3,d ?=.1,A ?=1,andL ?=100.2 The economy begins at steady state but at some point is attacked by Godzilla, destroying 70% of the

Scarcity and choice, how to solve problem of scarcity and choice

how to solve problem of scarcity and choice

Payment toward its bank loan, During the year, Calabash Clinic made a $50,0...

During the year, Calabash Clinic made a $50,000 cash payment toward its bank loan which it had previously recorded; $40,000 was for principal, and $10,000 was to pay the full amoun

Islm curve, why lm curve upward sloping and is curve downward sloping?

why lm curve upward sloping and is curve downward sloping?

Private sector in the circular flow, Private sector in the circular flow ...

Private sector in the circular flow The private sector total income is known as the national income. Because private sector receives the entire return from the factors of pr

Wonderland department of commerce, In 2010, Wonderlanders consumed 15 milli...

In 2010, Wonderlanders consumed 15 million liters of rum at an average price of $5 per liter. The Wonderland department of commerce has estimated that the price elasticity of the d

Groth model, what role does interst rate play in refernce to output?

what role does interst rate play in refernce to output?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd