tailieunhanh - Ten Principles of Economics - Part 72

Ten Principles of Economics - Part 72. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 32 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND 735 holdings are a small part of household wealth the wealth effect is the least important of the three. In addition because exports and imports represent only a small fraction of . GDP the exchange-rate effect is not very large for the . economy. This effect is much more important for smaller countries because smaller countries typically export and import a higher fraction of their GDP. For the . economy the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect. To understand how policy influences aggregate demand therefore we examine the interest-rate effect in more detail. Here we develop a theory of how the interest rate is determined called the theory of liquidity preference. After we develop this theory we use it to understand the downward slope of the aggregatedemand curve and how monetary policy shifts this curve. By shedding new light on the aggregate-demand curve the theory of liquidity preference expands our understanding of short-run economic fluctuations. theory of liquidity preference Keynes s theory that the interest rate adjusts to bring money supply and money demand into balance THE THEORY OF LIQUIDITY PREFERENCE In his classic book The General Theory of Employment Interest and Money John Maynard Keynes proposed the theory of liquidity preference to explain what factors determine the economy s interest rate. The theory is in essence just an application of supply and demand. According to Keynes the interest rate adjusts to balance the supply and demand for money. You may recall from Chapter 23 that economists distinguish between two interest rates The nominal interest rate is the interest rate as usually reported and the real interest rate is the interest rate corrected for the effects of inflation. Which interest rate are we now trying to explain The answer is both. In the analysis that follows we hold constant the .