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34
The Influence of Monetary and
Fiscal Policy on Aggregate Demand
Economics
PRINCIPLES OF
N. Gregory Mankiw
1
Introduction
▪ Earlier chapters covered:
▪ the long-run effects of fiscal policy
on interest rates, investment, economic growth
▪ the long-run effects of monetary policy
on the price level and inflation rate
▪ This chapter focuses on the short-run effects
of fiscal and monetary policy,
which work through aggregate demand.
▪ Next:
A supply-demand model that helps explain the
interest-rate effect and how monetary policy
affects aggregate demand.
r1
P1
r2 P2
MD1 AD
MD2
M Y1 Y2 Y
r2
P1
r1
AD1
MD AD2
M Y2 Y1 Y
A $20b increase in G P
initially shifts AD
to the right by $20b.
AD2 AD3
The increase in Y AD1
causes C to rise,
P1
which shifts AD
further to the right. $20 billion
Y1 Y2 Y3 Y
The multiplier
AD AD2
r2 AD1 3
P1
r1
MD2 $20 billion
MD1
M Y1 Y3 Y2 Y
2001:
George W Bush pushed for a
tax cut that helped the economy
recover from a recession that
had just begun.
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CHAPTER SUMMARY
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CHAPTER SUMMARY
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CHAPTER SUMMARY
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