Macro: Ch 21 Redwine

When income is $10,000, consumption spending is $6,500. For this economy an initial increase of $200 in net exports translates into a(n)

$800 increase in aggregate demand in the absence of the crowding-out effect.

A situation in which the fed's target interest rate has fallen as far as it can, is sometimes described as a

liquidity trap

The goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

If the federal reserve increases the money supply, then initially there is a

surplus in the money market, so people will want to buy bonds

People choose to hold a larger quantity of money if

the interest rate falls, which causes the opportunity cost of holding money to fall

Fiscal policy is determined by

The president and congress and involves changing government spending and taxation

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves

if expected inflation is constant then when the nominal interest rate increases, the real interest rate

increases by the change in the nominal interest rate

Order of the logic of interest rate effect

price level increases, aggregate demand increases (shifting right), interest rate increases, quantity of output decreases

Assume the Marginal propensity to consume (MPC) is .625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the

right by $68 billion