Chapter 34 Review

Chapter 34 talks about how the government’s tools of monetary and fiscal policy influence the position of the aggregate demand curve. I would rate this chapter a difficulty level of 1.5//3. This is because we were already introduced to the aggregate demand curve and its shifts in the previous chapter, and this chapter introduces a few new concepts, but it mostly reinforces my knowledge of the previous chapter in addition to a little more.

The book introduces the role of interest-rate targets and fed policy. Monetary policy can be described either in terms of the money supply or in terms of the interest rate. The Fed can control the money supply or interest rate, but not both. While the recent past has been a period of relative stability, stable interest rates tend to be pro-cyclical rather than counter-cyclical--which should be the focus of macroeconomic policy.

The book introduces two macroeconomic effects that make the size of the shift in aggregate demand differ from the change in G. This is the Multiplier Effect and the Crowding-out Effect. The multiplier effect is  the additional shifts in aggregate demand that result when expansionary fiscal policy increase income and thereby increases consumer spending.  Crowding effect happens when the offset in AD that results when expansionary fiscal policy raises the interest and thereby reduces investment spending. The multiplier effect is typically negated from the crowding effect.