Macroeconomics CH 21

the money demand curve slopes

downward

as the price goes up, the quantity of money demanded..

goes up

A decrease in personal income taxes..

household's disposable income increases, and consumption increases. AG increases, and some increase in the GDP

Expansionary fiscal policy

increase in government spending, or an increase/decrease of taxation. Shifts AD right

what is the appropriate response to a sharp increase in investment spending, assuming policy makers want to stabilize output?

increase taxes

suppose investment spending falls. To offset the changes in output the Federal reserve could..

increase the money supply. this increase would also move the price level closer to its value before the decline in investment spending

a fall in interest rate

increases money demand

as Y goes up..

spending increase, and money demanded increases

the Fed can use monetary policy to

stabilize output

A stock market boom increases household wealth.

the AD shifts right and output increases. The Fed should use contractionary policy to shrink the amount of money going out and raise the interest rate, and so the AD shifts left

Money supply is determined by

the central bank

using the liquidity-preference model, when the federal reserve increases the money supply,..

the equilibrium interest rate dercreases

the marginal propensity to consume (MPC) is defined as..

the fraction of extra income that a household consumes rather than saves

Marginal propensity to consume (MPC):

the fraction of extra income that households consume

the employment act of 1946 states that..

the gov should promote full employment and production

people choose to hold a smaller quantity of money if..

the interest rate rises, which causes the opportunity cost of holding money to rise

Money

the most liquid asset, but does not gain interest

crowding‐out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending. Fiscal expansion, higher income and money demand all increase, and shifts the AD right. By doing that the interest rate decreases

interest rate

the opportunity cost of holding money

as interest rate of money goes up

the opportunity cost of holding money goes up, and the quantity demanded of money goes down

expansionary monetary policy

there's an increase in money supply which causes interest rates to go down, investment to go up, output goes up, and AD shifts right

Liquidity trap

when the interest rate is zero, and here monetary policy may not work

The multiplier effect

Amplified effect on AD due to an initial change in AD. Due to further consumption and investment changes. not exclusive to fiscal policy

money multiplier

1/(1-MPC) marginal propensity to consume

if the MPC is 0.9, then the spending multiplier is

10

War breaks out in the Middle East, causing oil prices to soar.

AD shifts left, and output goes down. The government should use expansionary policy to add more money to the economy and lower interest rates. This will shift the AD right

what best represents the crowding out effect?

G goes up, Y goes up, demand for money goes up, equilibrium interest rate goes up, and the quantity of goods and services demanded goes down

if the MPC is 0.75, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the..

right by 400 billion dollars

The theory of liquidity preference

Short run: Interest rate adjusts to balance money supply and money demand

Congress tries to balance the budget by cutting gov't spending

The AD shifts left, output decreases. So the Fed should up the money supply by using expansionary monetary policy. So interest rates will go down and the AD will shift right.

critics of stabilization policy argue that..

There is a lag btw the time policy is passed and when it has an impact on society. The impact of policy may last longer than the problem it was designed to offset. Policy can be a source of, instead of a cure for, economic fluctuations.

economists who are skeptical about the relevance of liquidity traps argue that..

a central bank continues to have tools to stimulate the economy even after its interest rate target hits its lower bound of zero

a tax increase has both..

a crowding out effect and a multiplier effect

the multiplier effect..

amplifies the effects of an increase in gov expenditures, while the crowding out effect diminishes the effect

monetary policy

an increase or a decrease in the money supply

automatic stabalizers

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession

The minimum wage is not a..

automatic stabilizer

increasing money supply=

cutting the interest rate

Contractionaryfiscal policy

decrease in government spending, and an increase or decrease in taxation. Shifts AD left

the theory of liquidity preference illustrates the principle that..

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

Contractionary monetary policy

money supply goes down which causes the interest rate to go up, investment to go down, output goes down, and AD shifts left

Fiscal policy

policy regarding gov't spending and taxation

monetary policy can be implemented..

quickly, but most of its impact on aggregate demand occurs months after the policy is implimented