1. Copyright © 2010 Cengage Learning 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand

2. 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 © 2010 Cengage Learning

3. 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 3.... which increases the equilibrium interest rate... 2.... increases the demand for money... Quantity of Output 0 Price Level Aggregate demand P2P2 Y2Y2 Y P 4.... which in turn reduces the quantity of goods and services demanded. 1. An increase in the price level... r r2r2 Copyright © 2010 Cengage Learning

4. 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 3.... which increases the quantity of goods and services demanded at a given price level. 2.... the equilibrium interest rate falls... 1. When the central bank increases the money supply... Copyright © 2010 Cengage Learning

5. Figure 4 FTSE 100 Index, Opening Prices 2000-09 Copyright © 2010 Cengage Learning

6. Figure 5 Bank of England Base Rate, 2000-09 Copyright © 2010 Cengage Learning

7. Figure 6 The Multiplier Effect Quantity of Output Price Level 0 Aggregate demand,AD 1 £10 billion AD 2 AD 3 1. An increase in government purchases of £10 billion initially increases aggregate demand by £10 billion... 2.... but the multiplier effect can amplify the shift in aggregate demand. Copyright © 2010 Cengage Learning

8. Figure 7 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 3.... which increases the equilibrium interest rate... 2.... the increase in spending increases money demand... MD2D2 Quantity of Output 0 Price Level Aggregate demand, AD 1 (b) The Shift in Aggregate Demand 4.... 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 © 2010 Cengage Learning

9. Figure 8 Annualized Growth Rate in South Africa Copyright © 2010 Cengage Learning