FED spending money - Aggregate Demand?
If aggregate demand is = C + I + G + (X-M), where would the Fed's spending be calculated? Or is it monetarist?
- I didn't do it!Lv 61 decade agoFavorite Answer
Your equation shows the equilibrium in the non-financial sector of the economy. It is also known as the IS -Curve. The financial markets are represented by the LM-Curve which shows the equilibrium between money supply and demand as M/P=L(r,Y). The left hand side representing the real money supply and the right hand side the money demand as a function of interest rates and income. Spending by the Federal Reserve (The Fed) is affecting the LM curve and would therefore not show up in you equation. So, if the Fed is 'spending money' it shows as an increase in M and will shift the LM curve to the right.
- 1 decade ago
The Fed spending money to affect inflation is monetary policy. By spending money to buy back bonds that it gave out to banks it increases the money supply that banks have to loan out. This means that it is much easier to lend money so that the cost of lending that money (the interest rate) drops. When the interest rate drops businesses are more inclined to to make investments, therefore the I portion of aggregate demand, increases and, in turn, the aggregate demand curve shifts to the right and output increases.
But notice that P goes up, so that means that it is now harder to buy the same basket of goods. So consumer spending goes down. So C is also affected.Source(s): Go with the IS/LM answer below!!
- Anonymous1 decade ago
If 'Fed' means Federal Government, it's G.
If 'Fed' means Federal Reserve... the Federal reserve doesn't spend money, really.