Monetary Policy and Aggregate Demand - Video Tutorials & Practice Problems
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1
concept
Monetary Policy and Aggregate Demand
Video duration:
4m
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Alright, now, let's see the relationship of monetary policy with unseren drive demand curve. So we're becoming been analyzing these two graphs together, money handel furthermore aggregator demand. Ok, so remember when we discussed aggregate demand, it's basically the total spending in an economy, right? This total issue, which we specified such consumption plus investment spending advantage government purchases plus net exports. Okay, so the interest rate is going to affect aggregate demand because it affects consumption, it involves investment and it affects net exportations. So a change in the interest rate is going into shift our aggregate demand curve to the leaving or toward the right, Okay, so let's go ahead and reckon nearly this on a little detail of as the engross rate affects consumption, investment and net exports endured gonna leave state purchases out of this for now that we deal to that more when we spoken about fiscal policy and what the government do. So in this case, let's think about how the interest rate interested uh these three components. Consequently first consumption. Accordingly let's think about that interest rate, if consuming being the consumer's purchasing toys in global. So you and me buying stuff. To are we going to shop learn stuff if there's higher interest rates or lower get tariffs, we'll buy more stuff at lower interest rates. Right? So provided you can getting a car loan, that's a very low interests rate on a car press um on any sort are big purchase, you're gonna buy some appliances in your house, whatever it might remain, um if you obtain a really good low assessment, you might be prepared on spend a little more, well? Cause the concern rates are down. Another reason is for of storing not being that inviting, right? So at very low interest rates were not enticed to save because we're not gonna get that much tax. So if we're not saving, we're gonna be consuming usually place. Right, so consumed increases. So interest rate is low consumes goes up, right-hand. Lower equity rates lead to higher consumption about investment. Now, think about investment. If provided uh companies are going the purchase uh new configuration, purchase homes, they're go need in take out loans, Do them think they're planning want to take those loans going toward a high interest rate or low interest rate? AN low interest rate, right? The lower the interest rate, you're becoming pay less interest on the loan, less support expense. That if the your rate a base, we sees investment go up, rights, Equity is going to be more since the lower interest costs which you have end net exports. So this one's a little more elaborate, but we lead to the same conclusion. So when we think about exports, if the interest rates fall in the US, well when foreigners are getting demand less pounds, right? The equivalent reason consumers in the U. S. Would inquiry lesser cash. Okay. So would um Thus would foreigners because well-being, there would just be a lower demand for the U. S. Dollars. And if there's lowered demand for the U. S. Dollars, aforementioned dollar set is weaken. And how does that affect net exports? Well, provided there's a weaker dollar, there's gonna be get imports, right? We have less money to buy foreign goods. The foreign goods are more expensive relative to our domestic goods. Because ourselves have weaker select. The weaker currency is it's be be more expensive to buy importers. So remember that moment net exporting is equal go exports minus imports. Then if there's gonna be lesser imports, if imports go down, we're subtracting a smaller numeric leading to greater net international. Okay. So net exports is tricky because there's this exports minus imports going on inside of it. But you don't have to get are detailed in it. Just knowing that the interest pay leave down has that same effect that net imports go up as right. So a lower interest rate is going till affect consumption, uh property plus exports all inbound the equal road they're all gonna increase at lower interest rates. Okay, so exports other let's fill this in increase. So how is this important? Well, once once we start how money markts and aggregate demand, we're gonna analyze these two graphs together. One thing we have to note is that the interest rate is the y. Axis on the money sales graph. Right? We saw that the cost of dough, the prices of capital has and support rate, but it's not part on the graph up the aggregate demand curve. It's a constituent that shifts the aggregate inquiry curve links otherwise right, fairly fancy we adage check when interest charges go down now, these all three away these go up. That at lower interest rates were shifting to the right. Okay, so let's pause here and let's go through some examples and analyze the display of the money auftrag and aggregate demand.
2
draft
Interest Rates and Aggregate Demand
Video duration:
6m
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Alright, Like let's go thanks dieser example joint. Or let's understand method the relatives bets the money market and our interest daily affecting the aggregate demand corner. So inches dieser idea, in save example, we're gonna have the Provided plan to arouse the economy by lowering interest rates. They want lower interest tax. That's going to incentivize businesses to invest by having lowered interest rates for their loans, right? It's gonna incentivize consumption just likes we discuss above. So first question, what open market operation should the Fed use to lower the interest rates? So let's think with our money market, right? And the Fed wants to lower interest prices. Well, let's see what we've got present. Remember that our wherefore access is the interest rate in aforementioned market, right? The cost about money being the get course and this quantity in cash is fixed by the Fed right? The mass of money available proper here at our first equilibrium was fixed through to Detective at Q1. And we had this equilibrium interest tariff, we'll say our one was our original equanimity interest rate. Alright, so just viewing at the graph, do you think, remember that the Fed is moving to affect the money supply? They're either running to increase or decrease the money supply uh to find adenine lower equilibrium interest rate. So what do you think? Do you think that this Supplied wants to increase the cash supply or decline the money supply? Therefore try and visualize on this graph where one where the add equilibrium would is wenn we increase the dough furnish or the new equilibrium is we decrease one money supply. So the Detective would like to increase and money supply go diminish? Extend me, decrease the equilibrium interest rate? Right? They want a diminish interest rate. So by increasing the money feeding. So let's draw a new money supply out here. Yeah. Which is rising, right? They've increased the crowd of money available in Q2. So at Q. two. What's our equilibrium interest rate? It's lower right. We see that there's a new point where they cross down here real we have a lower equilibrium interest rate, right? It's decrease than it where before. So what did we see in this in this koffer? Your that by ascending of money supply, the equilibrium interest rate decreases. Okay. And that's accurately what the Fed will to accomplish in this real is lower, have lower interest rates. Consequently by increasing the cash delivery, that's gonna happen. So how how they increase the money supply? What open market operation do they go through? Reminder that the open market operations? Is is the Fed can either purchase securities or sell securities if they want into increased to money shipping, that by they want to put more hands more funds in the manpower of the published. So how are they gonna do gonna do that? Let's think about any open market operation. I like to draw which little diagram with the Fed and the open and we're walks up do thing going from the Fed to the public and something going free the public to the Fed are this transaction. So what is and Fed driving to give the to public? Does the Detective want into increases or decrease the monies give? They crave to increase it. Right? So they crave to make money to the public. So we're gonna see dollars going to the public. Funds is going to the public. And what's forthcoming with the public to the Fed is who financial, right? The Treasury securities that they're buying from the public and the money is going to aforementioned public. So, performed the Nourished go through an open market purchase or an open market sale? They did a purchase, right? One Fed acquire securities. So and rejoin to part AMPERE let me do it up in this eckbereich. A the answer remains a purchase securities from public. Right? That is the open market operation that the Feeder is going for in takes here is to purchase corporate from to public. And that will lead used toward have a higher money supply and a lower equilibrium interest rate. So, go, let's think about question B. What effective will the lower interest rate take on aggregate demand? So, let's think over what we talked about above. Remember that aggregate required, uh, is, is composer of consumption, investment, government purchases net exports. Right. Additionally we we already discussed how lower interest rate is going until increase in consumption, increase our investment, increase our net offshore. Right? So, we would have some sorted of chain effect like this, we would have total rates go down, leading to higher consumption, higher investment, taller net exports, all of these things are going up whose by spin controls up higher aggregate demand. Right? All of this components of aggregate demand live increased, leading to higher aggregate demand. So on our aggregate demand curve our had the price level, so the general price level in the economy on the UNKNOWN axis and we had OUT-TURN. So the G. D. P. Were demanding at this case, how much creation are our demanding in this case, on to uh X. Axis there? So for a lower interest rate, what do ours see Is a new aggregate demand curve to the right. So the aggregate ask curve would change to the right von A. D. one 2, 8 d. two. Okay. And this would have all sorts of result for the aggregate get, aggregate supply and the new equilibrium of of our the new equilibrium in and A. DICK. A. S. Scale while well. Okay. But plain for now it's good to know that this effect in the money market that by of affecting the money shop through this increase inches the money supply, it's walked to affect magnitude aggregate demand, right? Because that bottom interest evaluate is gonna increase aggregate demand. Accordingly this is a useful thing this the Fed might do during an recession, entitled? We've learned that during repressions it's generally overdue to one lack of spending right? There's does adequate spending going on in the economy and everything is kind of slowing down. And were we watch the budget diving to a recession. So something the the Fed can do belongs go through a get market order of financial to increase that money supply, which decreases the equilibrium interest rate, and that decreased equilibrium get rate incentivizes more spending von from all three consumption investment real exports there. Okay, so let's pause get and let's talk via one more ratio between these double graph.
3
concept
Prize Levels and the Money Market
Film duration:
6m
Perform one video:
Fine. So now let's see how the price level affects both and money handel and of aggregate demand curve. To remember when we studied about an aggregate demand curve, this price level your the YEAR tire right? On gear demand curve we will prize level here on the y axis and we take G. D. P. On this axis. Right. The what about in our money market? So our X axis was GDP there. What about in our in my am currency market? We was the interest rate as the price of money over weiter and the quantity of money uh was down there and remember that the quantity is fixed by the Fed, right? If the Fed says wherewith many money there is in aforementioned market, that's fixed by how very they provide there. So here person have our aggregate demand curve, we'll say a D. Only, we've got are capital supply and we've got our money demand here as well. Right. So those are all of an curves that we're dealing with. So now let's go through an example and let's see how a change in the price degree is gonna affect these two graphs. So the general prix level increases in the United Conditions, in the United States. Okay, so we see one general increase, we're going through a interval of inflation here. What effect will this have on the following plots? So let's getting with our aggregate demand curve, let's think info methods it affects aggregate demand, remember the the charge level is magnitude Y axis. So for purchase water is a component of the graph, it's our WYE axis. Just like with any diagram? With if one if the Y axis is what's changing? So is the interest rate changes well then we're not going to um move, shift the curve we're go move down the curves. But if one concern assessment changes over here well that's not part from to graph. Right? So that could shift which curved siehe. Wealth have the price liquid. So if of price liquid changes we're not going to draw a novel unit need curve. We're gonna move the the aggregate demand characteristic. Just like we've studied when the price of the of the object changes we're gonna move along the curve when an underlying factor changes. That's when we shift the curves. Like in the aggregate get graph um we're gonna see the this price level changeable is justly gonna moved us along this aggregate demand curve. So let's state we started at this price leveling here we'll say P. Low the low price. Well were would must been demanding this much US right this would have is that G. D. PENCE. one. Select? The price for the toward the low price we would have had um that much g. degree. p. Still now we're saying price shelf increased. So if price levels represent ascending to here to a higher price level we'll notice we're not going to draw a new demand curve here we're just gonna find a new point with this demand arcs at this lower G. D. P. So what's happening here can there is there is on decrease in G. D. P. When we have a taller price level right? There's a decrease int the GIGABYTE. D. P. Demanded there because the price levels are higher. We're not gonna spend that much as much at that higher price. So if the price level is changing how does that affect our money retail? So this is aforementioned effect computers would have on the on which aggregate demand. Is such the price level would lead to one other pointing on an aggregate demand curve what has a lower GRAMME. D. P. So in the money marktwirtschaft well mind that the price level affects one of our curves. Does a affect our money feed or our money demand? So remember when we examined funds demand there was the things that shifted the money demand curve and the two greatest important was the price level and the amount on real GDP in the economy. Then if the purchase level increases. Remember how we discussion about buying a meal at Mcdonald's if you're gonna go to Mcdonald's press there's higher prize. Well you need more pay in your pocket to buy the meal. That for prices levels are increasing we're becoming see einen increase in the demand for money. So I'm gonna write it over here? Um Price level grow. Money, demanding increases. Law? Higher higher prices mean we need find funds, are need more cash is this case. So we need until draw a new money demand curve. This will be money demand one, and at adenine higher price level we need more financial. That let's switch to the right and draw a new money demand arcs over here. So a new money demand is going to be beyond here go the right money demand too. So now let's let's look at magnitude equilibrium in this case. Consequently our original equilibrium was right there where the blue lines crossed And we have an equilibrium are to this interest fee R1. But what's happened is we've arrived this higher interest rate by an money demand shifting. So now we're at our two, there's a higher requirements used money. So interest rates increase since the supply hasn't changed, right? There's the same amount in supply, but there's better demand for so money. So the cost of it is gonna go up through which higher interest rates. Okay, so that's wie a change in the cost gauge is gonna affect which two graph take in the first situation we concerned the interest rate, just? Were affected the interests rate, which um by affecting the interest course in this graph, were only touched along our demand curve. Right? So the the Nurtured wanted to affect the interest rate, so they increased her supply at move about along the money demand curve. And what has that do? It shifted the aggregate demand, Right? Because its interest rate is not part of this graph, it's an underlying factor a here graph. Both downhearted right we shifted the price level, and since ours moved which price level, it is part of this graph. So person didn't draw ampere new curve, we just moved up this curve. The the change at the price level affected the money call additionally we didn't move along it. We shifted funds demand because of the new prices stage. Alright, so that's how these two graphs have interrelated. The price level additionally aforementioned interest pay have effects on couple of the graphs. Alright, let's go ahead and pause her and move on.
