Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 34 - Part XII - The Influence of Monetary and Fiscal Policy on Aggregate Demand - Problems and Applications - Page 768: 10

Answer

Since the government increases spending, the aggregate demand will also increase. In turn, demand for money increases. The change on aggregate demand would be bigger if the Fed keeps the interest rate the same.

Work Step by Step

If the Fed decides to maintain the current interest rate, money supply will increase, and aggregate demand won't decline. If the Fed decides to keep the money supply the same, then the interest rate would increase, and aggregate demand would decline.
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