Copyright © 2011 Cengage Learning 35 The Influence of Monetary and Fiscal Policy on Aggregate Demand

Figure 1 Equilibrium in the Money Market Quantity of money Interest rate 0 Money demand Quantity fixed by the central bank Money supply r2r2 M2M2 d M d r1r1 Equilibrium interest rate Copyright © 2011 Cengage Learning

Figure 2 The Money Market and the Slope of the Aggregate Demand Curve Quantity of money Quantity fixed by the central bank 0 Interest rate Money demand at price levelP2P2,MD 2 Money demand at price levelP,MD Money supply (a) The money market(b) The aggregate demand curve which increases the equilibrium interest rate increases the demand for money... Quantity of output 0 Price level Aggregate demand P2P2 Y2Y2 Y P which in turn reduces the quantity of goods and services demanded. 1. An increase in the price level... r r2r2 Copyright © 2011 Cengage Learning

Figure 3 A Monetary Injection MS 2 Money supply, MS Aggregate demand,AD Y Y P Money demand at price levelP AD 2 Quantity of money 0 Interest rate r r2r2 (a) The money market (b) The aggregate demand curve Quantity of output 0 Price level which increases the quantity of goods and services demanded at a given price level the equilibrium interest rate falls When the central bank increases the money supply... Copyright © 2011 Cengage Learning

Copyright © 2010 Cengage Learning Figure 4 FTSE 100 Index, Opening Prices 2000–09 Copyright © 2011 Cengage Learning

Copyright © 2010 Cengage Learning Figure 5 Bank of England Base Rate, 2000–09 Copyright © 2011 Cengage Learning

Figure 6 The Crowding-out Effect Quantity of money Quantity fixed by the central bank 0 Interest rate r Money demand,MD Money supply (a) The money market which increases the equilibrium interest rate the increase in spending increases money demand... MD2D2 Quantity of output 0 Price level Aggregate demand, AD 1 (b) The shift in aggregate demand which in turn partly offsets the initial increase in aggregate demand. AD 2 AD 3 1. When an increase in government purchases increases aggregate demand... r2r2 £10 billion Copyright © 2011 Cengage Learning

Copyright © 2010 Cengage Learning Figure 8 South Africa’s Annualized Growth Rate Copyright © 2011 Cengage Learning