Concepts
- Monetary Policy Causes Interest Rate Changes in the Money Market
- Impact on Investment Spending (Business Spending)
- Impact on Aggregate Demand
- Resulting Impact on RGDP and the Price Level (in both the Short-Run and the Long-Run)
Overview
In the previous lesson, we learned that when the Federal Reserve conducts monetary policy it triggers a change in the Federal Funds Rate through the money market. In this lesson, we learn how that change in the interest rate will influence the Aggregate Model. First thing to remember: businesses are very sensitive to changes in the interest rate because they borrow a lot of money. Thus, when the interest rate changes in the money market, it will have a significant influence on business spending (aka investment spending). This change in investment spending will cause aggregate demand to shift, potentially creating a direct change between the Price Level and RGDP. Pay close attention to the time frame in these questions. In the short-run the aggregate supply curve is upward sloping, while in the long-run aggregate supply is vertical. This is particularly important when identifying the change in RGDP.
Materials
- Lecture Notes
- Practice Problems
Lecture
Video Coming at Later Date
Quiz
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