Macroeconomics Ch 21

raises the value of the multiplier

An increase in the marginal propensity to consume (MPC)..

True

An increase in the money supply decreases the interest rate, increases investment, and shifts aggregate demand to the right.

Fiscal Policy

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

Stabilization policy

The use of fiscal and monetary policies to reduce fluctuations in the economy

True

Unemployment benefits are an example of an automatic stabilizer because when incomes fall, unemployment benefits rise.

unemployment benefits

What is an automatic stabilizer?

the investment accelerator

When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of..

the multiplier effect

When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of...

decreases the quantity demand of money

When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate...

shifts money demand to the right and increases the interest rate

When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level...

True

Because of the multiplier effect, an increase in government spending of $40 billion will shift the aggregate demand curve to the right by more than $40 billion (assuming there is no crowding out)

Automatic stabilizers

Changes in the fiscal policy that do not require deliberate action on the part of policymakers

True

Crowding out occurs when an increase in government spending increases incomes, shifts money demand to the right, raises the interest rate, and reduces private investment.

the interest rate effect

For the United States, the most important source of the downward slope of the aggregate-demand curve is...

4

If the marginal propensity to consume (MPC) is 0.75, the value of the multiplier is..

shift aggregate demand to the right

In the market for real output, the initial effect of a increase in the money supply is to...

True

In the short run, a decision by the Fed to increase the money supply is essentially the same as a decision to decrease the interest rate target.

the supply and demand for money

Kenyes liquidity preference theory of the interest rate suggests that the interest rate is determined by...

True

Keynes theory of liquidity preferences suggests that the interest rate is determined by the supply and demand for money (T)

Theory of liquidity preference

Keynes theory that the interest rate is determined by the supply and demand for money in the short run.

True

Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policies

True

Suppose investors and consumers become pessimistic about the future and cut back on expenditures. If the fed engages in activist stabilization policy, the policy response should be to increase the money supply.

Multiplier effect

The amplification of the shift in aggregate demand from expansionary fiscal policy, which raises incomes and further increases consumption expenditures

Investment accelerator

The amplification of the shift in aggregate demand from expansionary fiscal policy, which raises investment expenditures

Crowding-out effect

The dampening of the shift in aggregate demand from expansionary fiscal policy, which raises the interest rate and reduces investment spending

Liquidity

The ease with which an asset is converted into a medium of exchange

Marginal propensity to consume, or MPC

The fraction of extra income that a household spends on consumption

decrease the interest rate

The initial effect of an increase in the money supply is to..

aggregate demand to the right

The initial impact of an increasein government spending is to shift..

Federal funds rate

The interest rate banks charge one another for short-term loans

True

The interest-rate effect suggests that aggregate demand slopes downward because an increase in the price level shifts money demand to the right, increases the interest rate, and reduces investment.

increase the price level

The long-run effect of an increase in the money supply is to...