1. Ch. 32 Influence of Monetary Policy on AD

2. Interest Rate Effect Revisited
If PL rises, IR = …
Rise….why?
As PL rises, people demand ….
More money
See relationship to Quantity of AD in figure 32-2 p. 738
Note: a change in PL = a shift in MD – not a movement along the curve…explain why

3. Summary:
Increase PL =
Increase in Money D=
Increase in IR =
Decrease in Q of goods and services demanded (move along AD curve)

4. Changes in Money Supply (Monetary Policy)
Federal reserve increases money supply….draw/evaluate
IR decrease
“IR must fall to induce people to hold the additional money the Fed has created” - explain
= get loans and …
=lower opportunity cost of holding money
Consider its effect on AD (figure 32-3 p. 741

5. Summary
Fed increase MS =
Decreases IR =
Increases Q of goods and services demanded for any given PL =
AD shifts right

6. “The Role of Interest Rate Targets in Fed Policy”
Skip for now – will address in chapter on the Federal Reserve Bank
*know - *Case study p