Aggregate demand policies, Macroeconomics

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

Posted Date: 9/18/2012 5:21:13 AM | Location : United States

Related Discussions:- Aggregate demand policies, Assignment Help, Ask Question on Aggregate demand policies, Get Answer, Expert's Help, Aggregate demand policies Discussions

Write discussion on Aggregate demand policies
Your posts are moderated
Related Questions

Financing of Fiscal Deficit: Since the size of balanced budget of the multiplier is small, it is not for all time possible to get the needed demand expansion by raising the exp

A monopoly has a total cost function of C(Q) = 8Q and faces a market demand Q = 100 ? 2p, (a) calculate the deadweight loss; (b) The firm now spent an amount equal to half of

An attorney supplies 40 hours of work per week when her fee is $100 per hour but supplies 60 hours of work per week when her fee rises to $120 per hour. Using the midpoint formula,

concept of static and dynamic multiplier

Q1. The poorest countries in the world have a per capita income of about $600 today. We can reasonably assume that it is nearly impossible to live on an income below half this leve

Given the above trade between the two countries, explain the trade effects on product prices, and factor incomes. Why do these effects occur?

A, Explain how a person can be free to choose but his or her choices are casually determined by past event 2 B , Draw the casual tree for newcomb''s problem when Eve can''t perfe

By what percentage did the price level, as measured by this index, rise between 1984 and 2005?

Assume an economy that is operating above full employment. A. Draw a correctly labeled AD/AS graph showing: i. the problem in the economy ii. current price level and output iii. fu