Macro Lesson 14

A reduction in personal income taxes increases Aggregate Demand through

an increase in personal consumption.

If the Fed conducts open-market purchases, the money supply

increases and aggregate demand shifts right.

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

As the MPC gets close to 1, the value of the multiplier approaches

infinity.

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

likely smaller than if the cut had been permanent.

A policy that results in slow and steady growth of the money supply is an example of

a "passive" monetary policy.

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.

A tax cut shifts the aggregate demand curve the farthest if

the MPC is large and if the tax cut is permanent.

According to John Maynard Keynes,

the interest rate adjusts to balance the supply of, and demand for, money.

An example of an automatic stabilizer is

unemployment benefits.