Econ Ch 12 Goods Market and the Money Market are related According to the Economics in Practice Businesses cautious about piling on additional debt in the recession have been reluctant to seek loans from banks the report explained Meanwhile underwriting standards at banks have tightened so much that small businesses which are considered to be riskier investments can t squeeze through If level of optimism for small businesses improves the demand for loans will increase or shift to the right This will cause the quantity of loans supplied to increase because it will cause a movement along the supply line Planned investment is not dependent on the interest rate the graph of the investment function is a vertical line When planned investment and consumption are independent from interest rate planned aggregate expenditure remains unchanged even when interest rate is reduced Same situation as above and money supply increased interest rates fall but GDP does not change A decrease in investor confidence leads to a sharp decrease in orders for new plants equipment decreases the level of investment When investment falls due to a worsening of future expectations GDP or income falls because of a negative multiplier effect As income falls demand for money and rate of interest also falls Crowding out effect The tendency for increases in government spending to cause reductions in private investment spending The extent of crowding out effect increases if planned investment becomes more sensitive to changes in interest rate When investor confidence increases then investment GDP demand for money and interest rate all increase Bank panic when a large number of people decide to withdraw their cash from many commercial banks Bank run when a large number of people decide to withdraw their cash from a commercial bank The consumption link decrease in consumption brought about by an increase in the interest rate contributes to the overall decrease in output Real wealth balance effect The change in consumption brought about by a change in real wealth that results from a change in the price level According to the real wealth balance effect a decrease in the price level increases consumers expenditures due to an increase in the purchasing power of household wealth Higher price level lowers the purchasing power of consumers money assets and causes a decrease in consumption The derivation of an economy s AD curve requires knowledge regarding the interaction between the goods market and the money market During a recession investment may not respond positively to lower interest rates since low demand for goods leads to low capital utilization and low investment Links income demand for money planned investment interest rate Expansionary fiscal policy is either an increase in government spending or a reduction in net taxes aimed at increasing aggregate output Expansionary monetary policy is an increase in the money supply aimed at increasing aggregate output Determinants of planned investment are interest rate expectations of future sales capital utilization rates relative capital and labor costs
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