Chapter 34

Chapter 34 discusses the effect of monetary and fiscal policies on the aggregate demand/supply curves. Discussing why the aggregate demand is downward sloping, being the wealth, interest, and real exchange effect. The interest is a key determinant of aggregate demand. We use the theory of liquidity preference to show how interest rates affect aggregate supply and demand. In the book it refers that we are determining are both nominal and real since since in the short run, expected inflation is unchanging so changes in the nominal equal real interest rates. The interest rate is the opportunity cost of money. When interest rates are high, people like to hold their money and economize it through bonds thus aggregate demand is reduced. Monetary policies target changing the interest rates or the money supply thus shifting the aggregate demand.
Fiscal policy refers to the government’s choices on the levels of government purchases and taxes. While fiscal policy can influence growth in the long run, its primary impact in the short run is on aggregate demand. When the government changes their level of government purchases of taxes, two outcomes can come into play: the multiplier effect and the crowding out effect. In the multiplier effect for example, the government purchases $20 billion worth of aircrafts. The incomes, wages, and profits rise in the aircraft manufacturers allowing the them to increase on consumption goods which raises the incomes of other firms. Since aggregate demand shifts right and may rise more than the government purchases, these government purchases are said to have the multiplier effect. The crowding out effect is the exact opposite of the multiplier effect. An increase in government purchases (as in the case above) raises incomes, which shifts the demand for money to the right. This raises the interest rate, which lowers investment. Thus, an increase in government purchases increases the interest rate and reduces, or crowds out, private investment. Due to crowding out, the aggregate-demand curve may shift right by less than the increase in government purchases.
Level of difficulty 2/3.

Article Review #10

In this article the authors convey that participants have internalized a faith in which central bankers are responsible for market outcomes. Then they go on and explain how monetary policy is a mold-able subject, that can be easily played with when it comes to politicians and big power. They also attack the Central Bank Omnipotence by stating that is turning into the Narrative of central bank competition, which in return means that difficulties have risen due to gigantic global debt. Q3 and Q4, being peaks in the economy in 2014, have been in decline, and then the authors go on stating how such low-high percentage numbers cannot be unless we are already in a recession. The contractions in exports are affecting trade levels and the recession is highlighted. Due to such things, Global growth is contracting, trade values from US, Asian and European worlds will pop the remains of the monetary policy.  The domestic political pressure to raise protectionist barriers and get a great part of the smaller trade. The government uses depreciation in the monetary system as its greatest weapon to keep business, or "factories", running. Meaning that China will have to cut prices in order to devalue its currency. The author then goes and states,"Competitive death spiral of monetary policy which will put everyone in worse positions shrinking the global pie further", meaning that due to such monetary policies and methods the global pie is to shrink even more!! To end the article the prisoner's dilemma is applied to real life. When global trade shrinks, the payoffs from monetary policy defections are no longer less than the payoff of monetary cooperation, defect is the domain, and there's a free rider who gets to take advantage of all others. Meaning "survival" mode.