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Ch. 32 Influence of Monetary Policy on AD

Ch. 32 Influence of Monetary Policy on AD. Interest Rate Effect Revisited. See relationship to Quantity of AD in figure 32-2 p. 738. If PL rises, IR = … Rise….why? As PL rises, people demand …. More money. Note: a change in PL = a shift in MD – not a movement along the curve…explain why.

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Ch. 32 Influence of Monetary Policy on AD

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  1. Ch. 32 Influence of Monetary Policy on AD

  2. Interest Rate Effect Revisited See relationship to Quantity of AD in figure 32-2 p. 738 • If PL rises, IR = … • Rise….why? • As PL rises, people demand …. • More money Note: a change in PL = a shift in MD – not a movement along the curve…explain why

  3. Summary: • Increase PL = • Increase in Money D= • Increase in IR = • Decrease in Q of goods and services demanded (move along AD curve)

  4. Changes in Money Supply (Monetary Policy) • Federal reserve increases money supply….draw/evaluate • IR decrease • “IR must fall to induce people to hold the additional money the Fed has created” - explain • = get loans and … • =lower opportunity cost of holding money • Consider its effect on AD (figure 32-3 p. 741

  5. Summary • Fed increase MS = • Decreases IR = • Increases Q of goods and services demanded for any given PL = • AD shifts right

  6. “The Role of Interest Rate Targets in Fed Policy” • Skip for now – will address in chapter on the Federal Reserve Bank • *know - *Case study p. 743-44

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