Chapter 34

Chapter 34 is describing the connection between two markets; the money supply and the agg. demand and agg. supply market. In the money supply market, there is a downward sloping curve for money demanded (due to the theory of liquidity) and a vertical money supply (controlled by the Fed through open-market operations). The equilibrium of these two defines the interest rate, thus affect agg. demand. Two different types of policies are discussed, monetary and fiscal. Monetary refers to Fed while fiscal refers to government. In addition, the money multiplier and MPC (marginal propensity to consume) are related. These functions are used for the multiplier effect.