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10 Cards in this Set
- Front
- Back
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Although Federal Reserve Chairman, Alan Greenspan was urged to go to a tighter monetary policy and raise interest rates in 1996, he did not. Why was he urged to do this? Why did it turn out he was right?
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Because of fear of inflationary gap.
-B/c he knew economy would auto-correct itself |
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We examined three reasons why aggregate demand, AD, is inversely related to the rate of inflation.
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1. Feds monetary Policy rule
2. Real Wealth Effect 3. Uncertainty |
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explain Fed's Monetary Policy
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Fed believes inflation will increase it would move along aggregate demand curve
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explain Real Wealth Effect
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money balances is a fixed asset and will affect household & business spending
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explain Uncertainty
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people reduce money when uncertain, which increases inflation and decrease in aggregate curve
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There are four factors that will shift AD curve. What are they?
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1. Changes in Exogenous (household and gov spending)
2. Changes in Business and Household Wealth 3.Changes in Expectations 4.Shift in the Fed's monetary policy |
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How will changes in exogenous spending (household and gov) shift?
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Increase- Shift to Right
Decrease- Shift to Left |
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How will changes in Business and Household wealth shift?
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Increase in Wealth- Shift to Right
Decrease in Wealth- Shift left |
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How will changes in Expectations shift?
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increase- shifts right
decrease- shifts left |
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How will shifts in the monetary policy shift?
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-A tighter policy shifts MPR up
- A looser policy shifts MPR down |
