chapter 21 Flashcards
Fiscal policy is determined by
Fiscal policy refers to an economic strategy that utilizes the taxing and spending powers of the government to impact a nation’s economy. It is distinct from monetary policy, which is usually set by a central bank and focuses on market interest rates and the money supply.
The quantity of money demanded decreases as the interest rate rises.
Note that as the interest rate rises, the amount of interest you can receive by investing in the government bond increases. Therefore, the opportunity cost of holding your inheritance money in a non-interest-bearing account increases.
INCREASING THE PRICE LEVEL WILL RAISE MONEY DEMAND AND INCREASE INTEREST RATE BECUASE…
The higher price level raises money demand, causing the interest rate to rise. The higher interest rate discourages households and businesses from borrowing to finance residential and business investment. Investment spending falls, leading to a decrease in the quantity of goods and services demanded in the economy. The higher interest rate means a higher return on saving. This discourages consumption spending, which also leads to a decrease in the quantity of goods and services demanded in the economy.
The increase in the price level from 90 to 105 leads to a movement up and along the aggregate demand curve, and it moves the quantity of output demanded from $120 billion to $100 billion.
after an increase in price level…
After the increase in the price level, the transactions of buying and selling goods and services will require more money. Therefore, people will need to hold a larger quantity of money. Thus the higher price level causes the quantity of money demanded to increase at each interest rate, shifting the money demand curve to the right.
