Avila, Angelica U.

1BSA – ABM5

Assignment Nos.14 The Influence of Monetary and Fiscal Policy on Aggregate

Demand

1. In what way does monetary policy increase aggregate demand? Give an example and
explain your answer.

The activities performed by a country's central bank to control money supply and
achieve macroeconomic goals that encourage sustainable economic growth are referred
to as monetary policy, or the demand side of economic policy. Central banks implement
monetary policy by influencing the money supply in a given economy. Interest rates and
inflation are influenced by the money supply, and both are important predictors of
employment, debt costs, and consumption levels.

A central bank may engage in expansionary monetary policy by purchasing

Treasury notes, lowering interest rates on bank loans, or lowering the reserve
requirement. All of these measures expand the money supply, lowering interest rates.

This encourages banks to lend and businesses to take out loans. Through
employment, debt-financed corporate expansion can have a favorable impact on
consumer spending and investment, hence raising aggregate demand.

Expansionary fiscal policy boosts aggregate demand by increasing government

expenditure aor lowering taxes. When an economy is in recession and produces less
than its potential GDP, expansionary fiscal policy is most suitable.

2. Do you think the monetary policy affect aggregate demand? Why or why not?

3. What are possibly causes the lags in the effect of monetary and fiscal policy on
aggregate demand? Justify your answer.