Journaling of Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

                Chapter 34, titled ‘The Influence of Monetary and Fiscal Policy on Aggregate Demand’, talks about the short-run effects of monetary and fiscal policies. Chapter 34 is the second chapter that concentrates on short run fluctuations in the economy around its long-term trend.  It also addresses the theory behind stabilization policies and some of the shortcomings of stabilization policy. The interest rate is a key determinant of aggregate demand. Interest rate is determined by the supply and demand for money. The interest rate is the opportunity cost of holding money. In the long run, the interest rate is determined by the supply and demand for loanable funds. In the short run, the interest rate is determined by the supply and demand for money. Fiscal policy refers to the government’s choices of the levels of government purchases and taxes. While fiscal policy can influence growth in the long run, its primary impact in the short run is on aggregate demand. The other half of fiscal policy is taxation. Finally, there are arguments about whether the government should actively use monetary and fiscal policies to stabilize aggregate demand and, as a result, output and employment. Both sides agree that, in theory, activist policy can stabilize the economy. However some feel that, in practice, monetary and fiscal policy affects the economy with a substantial lag. Automatic stabilizers are changes in fiscal policy that automatically stimulate aggregate demand in a recession so that policymakers do not have to take deliberate action.

                Overall, I would give this chapter a difficulty rating of 2 out of 3.