ECON 104 11th Edition Lecture 18 Outline of Last Lecture I Real Economy II Keynesian System a Supply and Money Demand in the Money Market b Money Supply Curve Targeting the Money Supply for Growth c Aggregate Supply d Interest Curve III People Influence Transactions Money Supply IV Monetarists Outline of Current Lecture I Money Demand II Monetarists III Aggregate Demand a Why is Aggregate Demand Downward Sloping Current Lecture 1 Money Demand a The Federal Reserve System manipulates Money Supply to affect increase decrease Interest Rates b The Money Supply depends on the Money Demand Curve and the Elasticity of Money Demand c If Money Demand is steep then it is considered to be Inelastic which means Interest Rates are sensitive d If the Investment Curve is steep it is Inelastic e 2 Monetarists a Monetarists disregard Keynes they are classified as New Classical Economists b Equation of Exchange MV PQ Not a Theory because there are no assumptions These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute i Theories have assumptions we have to know the assumptions to understand the theories c If M Increases then PQ Increases or M Increases and V Decreases then PQ don t Change d Monetarists assume that V is Fixed Changes Slowly V PQ M because the way that we spend money is defined by cultural norms e Monetarists assume Full Employment that Q is Fixed Full Employment rarely occurs f If V an Q are Fixed the economy can only produce so much therefore increasing Money Supply with a stimulus price increase would lead to Inflation 3 Aggregate Demand i ii Aggregate Demand represents the relationship between Price Level and Total Quantity of Goods b Why is Aggregate Demand Downward Sloping i Impact on Interest Rates As Demand increases Interest Rates Increase Investment Decreases and Aggregate Expenditure Decreases Rising Prices to Declining Output ii Real Balance Effect As P Increases Purchasing Decreases W PQ which leads to a Decrease in Demand and Output iii Wealth Effect As P Increases the real value of your wealth Decreases