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Lecture Business economics - Lecture 25: The influence of monetary and fiscal policy on aggregate demand

In this chapter you will learn: Theory of liquidity preference, changes in the money supply, changes in government purchases, methodologies used in Pakistan, poverty reduction strategy, various indicators. | Review of the previous lecture In the long run, the aggregate supply curve is vertical. The short-run, the aggregate supply curve is upward sloping. The are three theories explaining the upward slope of short-run aggregate supply: the misperceptions theory, the sticky-wage theory, and the sticky-price theory. Bullet three, move the misperceptions theory to the end. Review of the previous lecture Events that alter the economy’s ability to produce output will shift the short-run aggregate-supply curve. Also, the position of the short-run aggregate-supply curve depends on the expected price level. One possible cause of economic fluctuations is a shift in aggregate demand. Review of the previous lecture A second possible cause of economic fluctuations is a shift in aggregate supply. Stagflation is a period of falling output and rising prices. The Influence of Monetary and Fiscal Policy on Aggregate Demand Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture 25 Lecture Outline | Review of the previous lecture In the long run, the aggregate supply curve is vertical. The short-run, the aggregate supply curve is upward sloping. The are three theories explaining the upward slope of short-run aggregate supply: the misperceptions theory, the sticky-wage theory, and the sticky-price theory. Bullet three, move the misperceptions theory to the end. Review of the previous lecture Events that alter the economy’s ability to produce output will shift the short-run aggregate-supply curve. Also, the position of the short-run aggregate-supply curve depends on the expected price level. One possible cause of economic fluctuations is a shift in aggregate demand. Review of the previous lecture A second possible cause of economic fluctuations is a shift in aggregate supply. Stagflation is a period of falling output and rising prices. The Influence of Monetary and Fiscal Policy on Aggregate Demand Instructor: Prof.Dr.Qaisar Abbas Course code: ECO 400 Lecture 25 Lecture Outline Theory of Liquidity Preference Changes in the Money Supply Changes in Government Purchases 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. 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. 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 For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect. 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 .