ECON Module 5

Figure 34-1 ​ Refer to Figure 34-1. If the current interest rate is 3.25 percent,

people will sell more bonds, which drives interest rates up.

When there is an excess supply of money,

people will try to get rid of money causing interest rates to fall. Investment increases.

If the interest rate is below the Fed's target, the Fed should

sell bonds to decrease the money supply.

Figure 34-5 ​ ​ ​ Refer to Figure 34-5. An increase in taxes will

shift aggregate demand from AD2 to AD3.

The Federal Open Market Committee is ​

​the group at the Federal Reserve that sets monetary policy.

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases.

When the Fed buys bonds the supply of money

increases and so aggregate demand shifts right

Aggregate demand includes

the quantity of goods and services the government, households, firms, and customers abroad want to buy.

If taxes

decrease, then consumption increases, and aggregate demand shifts rightward.

If households view a tax cut as temporary, then the tax cut

has less of an effect on aggregate demand than if households view it as permanent.

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows:

"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. "

If the MPC is 3/5 then the multiplier is

2.5, so a $100 increase in government spending increases aggregate demand by $250.

Figure 34-4 ​ ​ Refer to Figure 34-4.Which of the following events could explain an increase in the equilibrium interest rate fromr1tor3?

A increase in the price leve

Which of the following shifts aggregate demand to the left?

A decrease in the money supply

Which of the following would cause stagflation?

Aggregate supply shifts left.

Which of the following events shifts aggregate demand rightward?

An increase in government expenditures, but not a change in the price level

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

As the price level increases, the interest rate rises, so spending falls.

Which of the following would not be directly included in aggregate demand?

Government's tax collections

Figure 33-2 ​ Refer to Figure 33-2. If the economy is in long-run equilibrium, a favorable shift in short-run aggregate supply curve would move the economy from

O to P.

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

aggregate demand to the right.