Download the interest-rate effect.

34
The Influence of
Monetary and Fiscal
Policy on Aggregate
Demand
Aggregate Demand
• Many factors influence aggregate demand
besides monetary and fiscal policy.
• In particular, desired spending by
households and business firms determines
the overall demand for goods and services.
Aggregate Demand
• When desired spending changes, aggregate
demand shifts, causing short-run fluctuations in
output and employment.
• Monetary and fiscal policy are sometimes used
to offset those shifts and stabilize the economy.
34.1
HOW MONETARY
POLICY INFLUENCES
AGGREGATE DEMAND
34.1 HOW MONETARY POLICY
INFLUENCES AGGREGATE DEMAND
• The aggregate demand curve slopes
downward for three reasons:
– The wealth effect
– The interest-rate effect
– The exchange-rate effect
34.1 HOW MONETARY POLICY
INFLUENCES AGGREGATE DEMAND
• For the Chinese economy, the most important
reason for the downward slope of the aggregatedemand curve is the wealth effect.
• For the U.S. economy, the most important reason
for the downward slope of the aggregate-demand
curve is the interest-rate effect.
34.1.1 The Theory of Liquidity Preference
• Keynes developed the theory of liquidity
preference in order to explain what factors
determine the economy’s interest rate.
• According to the theory, the interest rate adjusts
to balance the supply and demand for money.
34.1.1 The Theory of Liquidity Preference
• Money Supply
– The money supply is controlled by the Fed
through:
• Open-market operations
• Changing the reserve requirements
• Changing the discount rate
– Because it is fixed by the Fed, the quantity of
money supplied does not depend on the interest
rate.
– The fixed money supply is represented by a
vertical supply curve.
34.1.1 The Theory of Liquidity Preference
• Money Demand
– Money demand is determined by several factors.
• According to the theory of liquidity preference, one of
the most important factors is the interest rate.
• People choose to hold money instead of other assets
that offer higher rates of return because money can be
used to buy goods and services.
• The opportunity cost of holding money is the interest
that could be earned on interest-earning assets.
• An increase in the interest rate raises the opportunity
cost of holding money.
• As a result, the quantity of money demanded is
reduced.
34.1.1 The Theory of Liquidity Preference
• Equilibrium in the Money Market
– According to the theory of liquidity preference:
• The interest rate adjusts to balance the supply
and demand for money.
• There is one interest rate, called the
equilibrium interest rate, at which the quantity
of money demanded equals the quantity of
money supplied.
34.1.1 The Theory of Liquidity Preference
• Equilibrium in the Money Market
– Assume the following about the economy:
• The price level is stuck at some level.
• For any given price level, the interest rate
adjusts to balance the supply and demand
for money.
• The level of output responds to the
aggregate demand for goods and services.
Figure 1 Equilibrium in the Money Market
Interest
Rate
Money
supply
r1
Equilibrium
interest
rate
r2
0
Money
demand
Md
Quantity fixed
by the Fed
M2d
Quantity of
Money
34.1.2 The Downward Slope of the
Aggregate Demand Curve
• The price level is one determinant of the
quantity of money demanded.
• A higher price level increases the quantity of
money demanded for any given interest rate.
• Higher money demand leads to a higher interest
rate.
• The quantity of goods and services demanded
falls.
34.1.2 The Downward Slope of the
Aggregate Demand Curve
• The end result of this analysis is a negative
relationship between the price level and the
quantity of goods and services demanded.
Figure 2 The Money Market and the Slope of the
Aggregate-Demand Curve
(a) The Money Market
Interest
Rate
(b) The Aggregate-Demand Curve
Price
Level
Money
supply
2. . . . increases the
demand for money . . .
P2
r2
Money demand at
price level P2 , MD2
r
3. . . .
which
increases
the
equilibrium 0
interest
rate . . .
Money demand at
price level P , MD
Quantity fixed
by the Fed
Quantity
of Money
1. An
P
increase
in the
price
level . . . 0
Aggregate
demand
Y2
Y
Quantity
of Output
4. . . . which in turn reduces the quantity
of goods and services demanded.
34.1.3 Changes in the Money Supply
• The Fed can shift the aggregate demand curve
when it changes monetary policy.
• An increase in the money supply shifts the
money supply curve to the right.
• Without a change in the money demand curve,
the interest rate falls.
• Falling interest rates increase the quantity of
goods and services demanded.
Figure 3 A Monetary Injection
(b) The Aggregate-Demand Curve
(a) The Money Market
Interest
Rate
r
2. . . . the
equilibrium
interest rate
falls . . .
Money
supply,
MS
Price
Level
MS2
1. When the Fed
increases the
money supply . . .
P
r2
AD2
Money demand
at price level P
0
Quantity
of Money
Aggregate
demand, AD
0
Y
Y
Quantity
of Output
3. . . . which increases the quantity of goods
and services demanded at a given price level.
34.1.3 Changes in the Money Supply
• When the Fed increases the money supply, it
lowers the interest rate and increases the quantity
of goods and services demanded at any given
price level, shifting aggregate-demand to the right.
• When the Fed contracts the money supply, it
raises the interest rate and reduces the quantity of
goods and services demanded at any given price
level, shifting aggregate-demand to the left.
34.1.4 The Role of Interest-Rate Targets
in Fed Policy
• Monetary policy can be described either in terms
of the money supply or in terms of the interest rate.
• Changes in monetary policy can be viewed either
in terms of a changing target for the interest rate or
in terms of a change in the money supply.
• A target for the federal funds rate affects the
money market equilibrium, which influences
aggregate demand.
34.2
HOW FISCAL POLICY
INFLUENCES
AGGREGATE DEMAND
34.2 HOW FISCAL POLICY
INFLUENCES AGGREGATE DEMAND
• Fiscal policy refers to the government’s choices
regarding the overall level of government
purchases or taxes.
• Fiscal policy influences saving, investment, and
growth in the long run.
• In the short run, fiscal policy primarily affects
the aggregate demand.
34.2.1 Changes in Government Purchases
• When policymakers change the money supply
or taxes, the effect on aggregate demand is
indirect—through the spending decisions of
firms or households.
• When the government alters its own purchases
of goods or services, it shifts the aggregatedemand curve directly.
34.2.1 Changes in Government Purchases
• There are two macroeconomic effects from
the change in government purchases:
– The multiplier effect
– The crowding-out effect
34.2.2 The Multiplier Effect
• Government purchases are said to have a
multiplier effect on aggregate demand.
– Each dollar spent by the government can
raise the aggregate demand for goods and
services by more than a dollar.
34.2.2 The Multiplier Effect
• The multiplier effect refers to the additional
shifts in aggregate demand that result when
expansionary fiscal policy increases income
and thereby increases consumer spending.
Figure 4 The Multiplier Effect
Price
Level
2. . . . but the multiplier
effect can amplify the
shift in aggregate
demand.
$20 billion
AD3
AD2
Aggregate demand, AD1
0
1. An increase in government purchases
of $20 billion initially increases aggregate
demand by $20 billion . . .
Quantity of
Output
34.2.3 A Formula for the Spending Multiplier
• The formula for the multiplier is:
Multiplier = 1/(1 - MPC)= 1/ MPS
• An important number in this formula is the
marginal propensity to consume (MPC).
– It is the fraction of extra income that a
household consumes rather than saves.
34.2.3 A Formula for the Spending Multiplier
• If the MPC is 3/4, then the multiplier will be:
Multiplier = 1/(1 - 3/4) = 4
• In this case, a $20 billion increase in
government spending generates $80 billion of
increased demand for goods and services.
乘数公式的证明　(高鸿业《西方经济学》第
,
3版(宏观部分), p 459)
以y和i分别代表收入增量和投资增量，则：
y  i  i   2 i   3 i     n 1 i
 i  (1     2   3     n 1 )
括号中各项代表一个无穷几何级数，由于边际消费倾向 假设小于1，
因此该级数是收敛的，令：
(1) z  1     2   3     n 1
(2) z     2   3     n 1   n
以(1)式减(2)式，得：
n
1


z (1   )  1   n , z
.
1 
由于0    1，所以当n  ,  n  0，因此，
1
z
 k.
1 
三部门经济中各种乘数(高鸿业《西方经济学》
(宏观), p 462)
三部门中的总支出：
y  c  i  g     ( y  t )  i  g , 其中y d  y  t.
(1) y 
  i  g  t
.
1 
一、政府购买支出乘数
y
1
1
kg 


.
g 1   1  MPC
在(1)式中，若其他条件不变，只有政府购买支出g变动，则：
 0  i0  g 0   t 0
 0  i0  g 1   t 0
y0 
, y 
.
1 
1 
g1  g 0
g
y  y1  y 0 

,
1 
1 
y
1
1
  kg 

.
g
1   1  MPC
三部门经济中各种乘数(高鸿业《西方经济学》
(宏观), p 462)
三部门中的总支出：
y  c  i  g     ( y  t )  i  g , 其中y d  y  t.
  i  g  t
(1) y 
.
1 
二、政府税收乘数
在(1)式中，若其他条件不变，只有政府税收t变动，则：
 0  i0  g 0   t 0
 0  i 0  g 0   t1
y0 
, y 
.
1 
1 
 t1  t 0  t
y  y1  y 0 

,
1 
1 
y

 MPC
  k tax 

.
t
1   1  MPC
推导开放经济条件下的政府购买乘数的表达式？
解答：考虑开放经济的宏观经济模型，得：
y  c  i  g  x  m,
c    y,
m  m0  by, 其中i, g , x, m0 为常数,
b为边际消费倾向, 为边际进口倾向.
则　y 
1
( a  m0  i  g  x )
1   b
dy
1
所以　K g 

.
dg 1    b
34.2.5 The Crowding-Out Effect
• Fiscal policy may not affect the economy as
strongly as predicted by the multiplier.
• An increase in government purchases causes the
interest rate to rise.
• A higher interest rate reduces investment
spending.
34.2.5 The Crowding-Out Effect
• This reduction in demand that results when a
fiscal expansion raises the interest rate is called
the crowding-out effect.
• The crowding-out effect tends to dampen (vt.
make sth. less strong, restrain) the effects of
fiscal policy on aggregate demand.
Figure 5 The Crowding-Out Effect
(a) The Money Market
Interest
Rate
(b) The Shift in Aggregate Demand
Price
Level
Money
supply
2. . . . the increase in
spending increases
money demand . . .
$20 billion
4. . . . which in turn
partly offsets the
initial increase in
aggregate demand.
r2
3. . . . which
increases
the
equilibrium
interest
rate . . .
AD2
r
AD3
M D2
Aggregate demand, AD1
Money demand, MD
0
Quantity fixed
by the Fed
Quantity
of Money
0
1. When an increase in government
purchases increases aggregate
demand . . .
Quantity
of Output
34.2.5 The Crowding-Out Effect
• When the government increases its purchases by
$20 billion, the aggregate demand for goods and
services could rise by more or less than $20
billion, depending on whether the multiplier
effect or the crowding-out effect is larger.
34.2.6 Changes in Taxes
• When the government cuts personal income
taxes, it increases households’ take-home pay.
– Households save some of this additional
income.
– Households also spend some of it on
consumer goods.
– Increased household spending shifts the
aggregate-demand curve to the right.
34.2.6 Changes in Taxes
• The size of the shift in aggregate demand
resulting from a tax change is affected by the
multiplier and crowding-out effects.
• It is also determined by the households’
perceptions (n. way of seeing, or understanding sth.看法,理
解) about the permanency of the tax change.
34.3
USING POLICY TO
STABILIZE THE
ECONOMY
34.3 USING POLICY TO
STABILIZE THE ECONOMY
• Economic stabilization has been an explicit
goal of U.S. policy since the Employment
Act of 1946.
34.3.1 The Case for Active Stabilization
Policy
• The Employment Act has two implications:
– The government should avoid being the
cause of economic fluctuations.
– The government should respond to changes
in the private economy in order to stabilize
aggregate demand.
34.3.2 The Case against Active
Stabilization Policy
• Some economists argue that monetary and fiscal
policy destabilizes the economy.
• Monetary and fiscal policy affect the economy
with a substantial lag.
• They suggest the economy should be left to deal
with the short-run fluctuations on its own.
34.3.3 Automatic Stabilizers
• Automatic stabilizers are changes in fiscal policy
that stimulate aggregate demand when the
economy goes into a recession without
policymakers having to take any deliberate action.
• Automatic stabilizers include the tax system and
some forms of government spending.
34.3.3 Automatic Stabilizers
• The most important automatic stabilizer is the tax
system. When the economy goes into a recession,
the amount of taxes collected by the government
falls automatically because almost all taxes are
closely tied to economic activity. The personal
income tax depends on households’incomes, the
payroll tax depends on workers’earnings, and the
corporate income tax depends on firms’profits.
Because incomes, earnings, and profits all fall in a
recession, the governments’s tax revenue falls as
well. This automatic tax cut stimulates aggregate
demand and, thereby, reduces the magnitude of
economic fluctuations.
34.3.3 Automatic Stabilizers
• Government spending also acts as an automatic
stabilizer. In particular, when the economy goes
into a recession and workers are laid off, more
people apply for unemployment insurance benefits,
welfare benefits, and other forms of income
support. This automatic increase in government
spending stimulates aggregate demand at exactly
the time when aggregate demand is insufficient to
maintain full employment. (Indeed, when the
unemployment insurance system was first enacted
in the 1930s, economists who advocated this policy
did so in part because of its power as an automatic
stabilizer.)
34.3.3 Automatic Stabilizers
• The automatic stabilizer in the U.S. economy are
not sufficiently strong to prevent recessions
completely. Nonetheless, without these automatic
stabilizers, output and employment would probably
be more volatile than they are.
Summary
• Keynes proposed the theory of liquidity
preference to explain determinants of the
interest rate.
• According to this theory, the interest rate
adjusts to balance the supply and demand
for money.
Summary
• An increase in the price level raises money
demand and increases the interest rate.
• A higher interest rate reduces investment and,
thereby, the quantity of goods and services
demanded.
• The downward-sloping aggregate-demand curve
expresses this negative relationship between the
price-level and the quantity demanded.
Summary
• Policymakers can influence aggregate
demand with monetary policy.
• An increase in the money supply will
ultimately lead to the aggregate-demand
curve shifting to the right.
• A decrease in the money supply will
ultimately lead to the aggregate-demand
curve shifting to the left.
Summary
• Policymakers can influence aggregate
demand with fiscal policy.
• An increase in government purchases or a
cut in taxes shifts the aggregate-demand
curve to the right.
• A decrease in government purchases or an
increase in taxes shifts the aggregatedemand curve to the left.
Summary
• When the government alters spending or taxes, the
resulting shift in aggregate demand can be larger
or smaller than the fiscal change.
• The multiplier effect tends to amplify the effects
of fiscal policy on aggregate demand.
• The crowding-out effect tends to dampen the
effects of fiscal policy on aggregate demand.
Summary
• Because monetary and fiscal policy can influence
aggregate demand, the government sometimes
uses these policy instruments in an attempt to
stabilize the economy.
• Economists disagree about how active the
government should be in this effort.
– Advocates say that if the government does not
respond the result will be undesirable
fluctuations.
– Critics argue that attempts at stabilization often
turn out destabilizing.
Mankiw,ch34, Question for Review
• 1.What is the theory of liquidity preference? How does it
help explain the downward slope of the aggregate-demand
curve?
• 2. Use the theory of liquidity preference to explain how a
decrease in the money supply affects the aggregatedemand curve.
• 3. (Mankiw-Chapter34 )解释在封闭经济中，为什么政
府税收乘数小于政府支出乘数？
• 4. (Mankiw-Chapter34)解释为什么封闭经济中的支出
乘数大于开放经济的支出乘数？
复习题
1. 什么是流动偏好理论？ 这种理论如何有助于解释总需
求曲线的向右下方倾斜？
2. 用流动偏好理论解释货币供给减少如何影响总需求曲
线。
3. 政府支出30亿美元购买警车。解释为什么总需求的增
加会大于或小于30亿美元。
4. 假设对消费者信心衡量指标的调查表明，悲观主义情
绪蔓延全国。如果决策者无所作为，总需求会发生什
么变动？ 如果美联储想稳定总需求，它应该怎么做？
如果美联储无所作为，国会为了稳定总需求应该做什
么？
5. 举出一个起到自动稳定器作用的政府政策的例子。解
释为什么这种政策有这种效应。
1.Explain how each of the
following developments would affect the supply
of money, the demand for money, and the interest
rate. Illustrate your answers with diagrams.
A wave of optimism boosts business investment.
The Central Bank reduces reserve requirements.
An increase in oil prices shifts the short-run
aggregate-supply curve upward.
Households decide to hold more money to use for
holiday shopping.
(Mankiw-Chapter 34-p778)
a.
b.
c.
d.
利
率
r2
利
率
MS
Md'
r1
货币量
(a) A wave of optimism
boosts business investment,
thereby increase demand
for money and interest
rate will rise.
MS'
r1
r2
Md
MS
Md
货币量
(b)The Central Bank reduces
reserve requirements signifies
that the supply of money will
shift rightward with constant
the demand for money, the
interest rate will decline.
利
率
r2
P
MS
P2
AS'
AS
Md'
P1
r1
Md
AD
Q
货币量
(c) An increase in oil prices shifts the short-run aggregatesupply curve upward. High price increase the demand for
money and increase interest rate.
2. Suppose banks install automatic teller
machines on every block and, by making cash readily
available, reduce the amount of money people want on hold.
a. Assume the Fed does not change the money supply.
According to the theory of liquidity preference, what happens
to the interest rate? What happens to aggregate demand?
b. If the Fed wants to stabilize aggregate demand, how should
it respond?
(Mankiw Chapter 34 -p778.)
3.Consider two policies----a tax cut that
will last for only one year, and a tax cut that is expected to be
permanent. Which policy will stimulate greater spending by
consumers? Which policy will have the greater impact on
aggregate demand? Explain.
(Mankiw Chapter 34 -p778.)
4. The interest rate in the United
States fell sharply during 1991. Many observers believed
this decline showed that monetary policy was quite
expantionary during the year. Could this conclusion be
incorrect? (Hint:The United States hit the trough of a
recession in 1991.)
(Mankiw Chapter 34 -p778.)
5. In the early 1980s, new
legislation allowed banks to pay interest on checking
deposits, which they could not do previously.
a. If we define money to include checking deposits,
what effect did this legislation have on money
demand? Explain.
b. If the Federal Reserve had maintained a constant
money supply in the face of this change, what would
have happened to the interest rate? What would have
happen to aggregate demand and aggregate output?
C. If the Federal Reserve had maintained a constant
market interest rate (the interest rate on nonmonetary
assets) in the face of this change, what change in the
money supply would have been necessary? What
would have happened to aggregate demand and
aggregate output?
(Mankiw Chapter 34 -p778.)
6 . This chapter explains that
expansionary monetary policy reduces the interest rate and
thus stimulates demand for consumption and investment
goods. Explain how such policy also stimulates the demand
for net exports.
( Mankiw, Chapter34.--p779.)
7. Suppose economists observe that
an increase in government spending of $10 billion raises the
total demand for goods and services by $30 billion.
a. If these economists ignore the possibility of crowding
out, what would they estimate the marginal propensity to
consume (MPC) to be?
b. Now suppose the economists allow for crowding out.
Would their new estimate of the MPC be larger or smaller
than their initial one?
(Mankiw, Chapter34.--p779.)
8. Suppose the government reduces
taxes by $20 billion, that there is no crowding out, and
that the marginal propensity to consume is 3/4.
a. What is the initial effect of the tax reduction on aggregate
demand?
b. What additional effects follow this initial effect? What is
the total effect of the tax cut on aggregate demand?
c. How does the total effect of this $20 billion tax cut
compare to the total effect of a $20 billion increase in
government purchase? Why?
(Mankiw-p779, Chapter 34)
9. Suppose consumers suddenly become more optimistic
about their future incomes and decide to purchase $30
billion of additional goods and services. Will this change
have a “multiplied” effect on total output? Explain.
( Mankiw Chapter 34 -p779.) 9. Suppose government
spending increases.Would the effect on aggregate
demand be larger if the Federal Reserve took no
action in response, or if the Fed were committed to
maintaining a fixed interest rate? Explain.
(Mankiw Chapter 34 -p779.) 10. In which of the
following circumstances is expansionary fiscal policy
more likely to lead to a short-run increase in
investment? Explain.
a. when the investment accelerator is large or when it
is small?
b. when the interest sensitivity of investment is large,
or when it is small.
(Mankiw Chapter 34 -p779.) 11. Assume the economy is
in a recession. Explain how each of the following
policies would affect consumption and investment.
In each case, indicate any direct effects, any effects
resulting from changes in total output, any effects
resulting from changes in the interest rate, and the
overall effect. If there are conflicting effects
making the answer ambiguous, say so.
a. an increase in government spending
b. a reduction in taxes
c. an expansion of the money supply
• (Mankiw Chapter 34 -p779.) 12. For various reasons,
fiscal policy changes automatically when output
and employment fluctuate.
a. Explain why tax revenue changes when the
economy goes into a recession.
b. Explain why government spending changes when
the economy goes into a recession.
c. If the government were to operate under a strict
balanced-budget rule, what would it have to do in
a recession? Would that make the recession more
or less severe?
14. In response to an increase in the
money supply, would the following things be smaller,
larger, or no different in the long run than in the short run?
Consumer expenditures
The price level
The interest rate
Aggregate output
(Mankiw Chapter 34 -p731.)
a.
b.
c.
d.