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Aggregate Demand Curve and Federal Reserve Policy

1. A change in the real money supply can result either from a change in the normal money supply through Federal Reserve policy (holding the price level constant) or from a change in the price level ( holding the normal money supply constant). The change in the nominal money supply causes a shift of the aggregate demand curve, whereas a change in the price level causes a movement along the aggregate demand curve. Explain.

2. If the U.S. economy is operating near full employment and the exchange rate increases (the dollar appreciates), Explain why the Federal reserve will be less inclined to raise interest rates.

Solution Preview

1. The aggregate demand curve is formed by mapping price levels to demand. As prices increase, the level of demand will fall (people cannot afford to buy as much at higher prices), holding everything else constant. This is why the demand curve is downward sloping. So when prices change, we don't need to create a new demand curve. We just find the point along the demand curve that is ...

Solution Summary

The aggregate demand curve and federal reserve policies are determined.

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