Download 34 - Cengage Learning EMEA

The Influence of
Monetary and Fiscal
Policy on Aggregate
Demand
Copyright © 2010 Cengage Learning
34
Figure 1 Equilibrium in the Money Market
Interest
Rate
Money
supply
r1
Equilibrium
interest
rate
r2
0
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Money
demand
Md
Quantity fixed
by the central bank
M2d
Quantity of
Money
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 central bank
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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.
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 central
bank 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.
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Figure 4 FTSE 100 Index, Opening Prices 2000-09
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Figure 5 Bank of England Base Rate, 2000-09
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Figure 6 The Multiplier Effect
Price
Level
2. . . . but the multiplier
effect can amplify the
shift in aggregate
demand.
£10 billion
AD3
AD2
Aggregate demand, AD1
0
1. An increase in government purchases
of £10 billion initially increases aggregate
demand by £10 billion . . .
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Quantity of
Output
Figure 7 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 . . .
£10 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 central bank
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Quantity
of Money
0
1. When an increase in government
purchases increases aggregate
demand . . .
Quantity
of Output
Figure 8 Annualized Growth Rate in South Africa
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