How can what happens in the money market possibly affect what happens to economic output, inflation, and unemployment?
Changes in the money market, such as changes in interest rates, can affect the goods market by changing the interest rate. In addition, changes in the goods market, such as changes in aggregate output, can affect the money market by changing the demand for money. 2. If the government tries to stimulate the economy, will changes in the money market help or hurt? Fiscal and monetary policies are made less effective as a result of changes in the money market. For expansionary policies, the increase in aggregate output raises the demand for money, which raises interest rates and reduces investment. This tends to reduce or lessen the increase in real GDP. Changes in the money market also lessen the effectiveness of contractionary policies. 3. Can the government come up with a combination of policies that will make the recovery from a recession more rapid? Actions by the Fed can increase the effectiveness of fiscal policy. For example, if the government cuts taxes or increases spending in or
