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Asked Dec 8, 2019
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4) Suppose government spending increases. Would the effect on aggregate demand be larger if the Federal Reserve held the money supply constant in response or if the Fed were committed to maintaining a fixed interest rate? Explain

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If the government spending increases, aggregate demand increases; as a result, demand for money increases. If the Fed maintains a constant money supply, then an increase in money demand leads to a rise in the interest rate. This, in turn, leads to a decline in the aggregate demand.

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Aggregate Demand

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