macro module 12 - exam 4

what is the theory of liquidity preference?

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

What are automatic stabilizers?

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

what is the crowding out effect?

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

What is fiscal policy?

the setting of the level of government spending and taxation by government policymakers

what is an example of an automatic stabilizer?

unemployment benefits

what would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate demand curve?

with prices down and wages fixed by contract, Fargo concrete company decides to lay off workers

if the MPC is .50 and there are no crowding out or accelerator effects, then an initial increase in aggregate demand of $95 billion will eventually shift the aggregate demand curve to the right by

$190 billion

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

$60.75

what explains the crowding out effect?

an increase in government. expenditures increase the interest rate and so reduces investment soending

monetary policy can...

be described either in terms of the money supply or in terms of the interest rate

suppose there is a tax decrease, to stabilize output the federal reserve could

decrease the money supply

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate

_____ involves raising inflation expectations by commuting to keep interest rates low for an extended period of time

forward guidance

fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes

if the government wants to expand aggregate demand, it can _____ government purchases of ____ taxes?

increase, decrease

the multiplier effect states that there are additional shifts in aggregate demand from expansionary fiscal policy because it

increases income and thereby increases consumer spending

according to the liquidity preference theory, an increase in overall price level of 10% ...

increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

interest rate effect

an increase in Y causes an increase in ____ ____, other things equal

money demand

What is a liquidity trap?

occurs if interest rates have already fallen to around zero

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

when there is an excess supply of money ...

people will try to get rid of money causing interest rates to fall, investment increases

Critics of stabilization policy argue that

policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.

the process of the investment accelerator involves

positive feedback from aggregate demand to investment.

____ ____ in which they buy a larger variety of financial instruments such as mortgages, corporate debt, and longer term government bonds. this method increases the quantity of bank reserves

quantitative easing

other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions.

assume the MPC is .80, assume there is a multiplier effect and that the total crowding out effect is $14 billion. an increase in government purchases of $90 billion will shift aggregate demand to the

right by $436 billion

liquidity preference theory is most relevant to the

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

what is the multiplier effect?

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending