Chapter 21: Monetary and Fiscal Policy and Aggregate Demand

Decreases

Contractionary Monetary Policy _______ the money supply? (increases/decreases)

Money Supply

Controlled Through The FED In: > Open Market Operations > Changing The Reserve Requirements > Changing The Discount Rate

Equilibrium Interest Rate

rate at which the quantity of money demanded equals the quantity of money supplied?

Recognition Lags

takes time to determine if a recession is occurring?

Equilibrium In The Money Market

the interest rate adjusts to balance the supply and demand for money?

Crowding-Out Effect

the offset in aggregate demand that results when expansionary fiscal policy RASIES the interest rate and thereby reduces investment spending?

Falls

the quantity of goods and services demanded __________? (rises/falls)

Active Stabilization

use of fiscal policy to stimulate aggregate demand?

Expansion Monetary Policy

when the FED BUYS government bonds, it "prints new money" in order to pay for the bonds?

Increases

when the interest rate increases, the opportunity cost of holding money __________________? (Increases/Decreases)

Decreases

when the interest rate increases, the opportunity cost of the quantity of money demanded ___________________? (increases/decreases)

Price Level

determinant of the quantity of money demanded?

Theory of Liquidity Preference

Keynes's theory, that the interest rate adjusts to bring money supply and money demand into balance?

Multiplier Effect

> government INCREASES its total expenditures, the total change in equilibrium output exceeds the INCREASE in government spending > can AMPLIFY the shift in aggregate demand

Money Demand

> people choose to hold money instead of other assets that offer higher rates of return because money can be used to buy goods/services > an increase in interest rates raises the opportunity cost of holding money > the quantity of money demanded is reduced

Increases

A higher price level ______________ the quantity of money demanded for any given interest rate? (increases/decreases)

Decreases, Increases

A monetary injection by the FED ___________ interest rates and _____________ aggregate demand? (Increases/Decreases)

Increases

According to the theory of liquidity preference, if the quantity of money demanded is GREATER than the quantity supplied, the interest rate will ___________? (Increases/Decreases)

Decreases

According to the theory of liquidity preference, if the quantity of money demanded is GREATER than the quantity supplied, the quantity of money demanded ________________ (Increases/Decreases)

Increases

Expansion Monetary Policy _________ the money supply? (increases/decreases)

Higher

Higher Money Demand leads to a ______________ interest rate? (higher/lower)

Decreases, Left

If Taxes INCREASE, Consumption ______________, Aggregate Demand shifts _________? (Increase/Decrease), (Left/Right)

Decrease, Right

If the FED conducts Open-Market Operations, the money supply ___________________ and aggregate demand shifts __________? (Increase/Decrease), (Right/Left)

Increase, Left

In short run, a DECREASE in money supply causes interest rates to ________ and aggregate demand to shift __________? (Increase/Decrease), (Right/Left)

Decrease, Right

In short run, an INCREASE in money supply causes interest rates to ________ and aggregate demand to shift __________? (Increase/Decrease), (Right/Left)

Increase In Price Level, No Change in Interest Rate

What shifts money demand to the Right?

Contractionary Monetary Policy

When the FED SELLS government bonds it "takes the money" it receives in payment out of circulation?

Fall

according to liquidity preference theory, an INCREASE in the price level causes Investment to ____________? (rise/fall)

Increases

according to liquidity preference theory, an INCREASE in the price level does what to interest rate? (increases/decreases)

Right

according to liquidity preference theory, an INCREASE in the price level shifts the money demand curve ___________? (right/left)

Decreases, Increases

according to the crowding-out effect, a DECREASE in government spending ____________ the interest rate, and so __________ government spending? (increases/decreases)

Increases, Decreases

according to the crowding-out effect, an INCREASE in government spending ____________ the interest rate, and so __________ government spending? (increases/decreases)

Independent of Interest Rates

according to the theory of liquidity preference, money supply is?

Interest Rate

according to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

Automatic Stabilization

changes in the fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action?

Implementation Lags

congress generally only adjusts tax policy annually with the people of a new budget?

Passive Stabilization

natural result of the way government revenue collection and payments occur?