CH18: Influence on Monetary Fiscal Policy on AD

Question 1

How do interest rates affect QD for money?

Answer 1

An increase in the interest rate raises the opportunity cost of holding money. Could gain higher interest on savings, so Qd of money falls.

Question 2

Effect of MP on Q of G/S demanded?

Answer 2

Increase in money supply shifts MS curve right, decreasing interest rates, incresing C and I and NX.

Question 3

What is fiscal policy and who does it affect?

Answer 3

Changes in govt spending and taxation, affecting aggregate demand directly through G in AD.

Question 4

Two ways changes in govt can affect AD?

Answer 4

Multiplier effect: Additional increases in AD from increases in govt spending. 1/ (1-MPC). Marginal Propensity to Consume, or 1/(MPS).

Crowding out effect: Increase in govt purchases causes interest rates to rise. This causes C and I to fall.

Question 5

Time delay in FP and MP?

Answer 5

FP: 6m
MP: 18m