Aggregate Demand

Is it by the aggregate demand model demonstrates the extent to influence the national income tax?

Under the fixed monetary regime

When the market for goods and services are in balance, currencies affect the trade balance therefore the balance of payments, therefore the Central Bank intervenes to keep the equilibrium level.

The central bank injects money into the economy (expansive monetary policy), then the LM curve will expand to the right, so the national interest rate will fall.

The DA increased accordingly by the interest rate (Qo to Q1)

The central bank buys bonds or securities.

Reduction in the reserve requirement (banks) for reserves. If lower interest rate, there will be more capital outflows and as no money shrinks the LM curve decreases capital reserves, the effect is transient. It is an ineffective policy.

Contractionary monetary policy, increasing the aggregated sale of securities in the domestic market demand.

Under the flexible currency regime

Aggregate demand is equal to the investment plus the trade balance. The flexible exchange rate is the demand and supply of foreign exchange at which varies irregularly. The total expenditure of the foreign country is the external overall absorption *, increasing the rate of the foreign country decreases aggregate demand.

The increase in the interest rate decreases the consumption and investment so that and the other countries will be affected when making trade

The domestic interest rate equals the foreign interest rate. The product is claimed by the other countries, there is movement of money. The IS and LM are in equilibrium.

The central bank intervenes to buy bonds so the LM expands to the right, and low national rate; generating an increase in DA = increased consumption and Inversion this leads to:

The capital outflow from the country (seeking profitability abroad)

Increase the exchange rate (domestic currency depreciates)

Exports increase

Expands the IS curve to the right

The DA has increased and the trade balance too. Monetary policy is effective

Note: The monetary authority has the obligation to intervene in the foreign exchange market.

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