Macro Chpt 21

The government's choices regarding the overall level of government purchases and taxes is known as_________

fiscal policy

Refer to Figure 2. The economy is currently at point A. To stabilize output, the president and Congress can reduce _____ and/or increase _____.

government purchases, taxes

To reduce aggregate demand, the government may reduce_________ or increase_________ .

government spending, taxes

To stabilize output, the Federal Reserve will _________the money supply when aggregate demand falls

increase

An increase in households' desired money holding causes a(n)_________ in interest rates. This causes a(n)_________ in investment spending and aggregate demand.

increase, decrease

The crowding-out effect occurs because an increase in government spending_________ interest rates, causing to fall

increases, investment

Permanent tax changes have a _________effect on aggregate demand compared to temporary tax changes

larger

The ease with which an asset can be converted into the medium of exchange is known as _________.

liquidity

The theory of _________states that the _________adjusts to bring money supply and money demand into balance.

liquidity preference, interest rate

The wealth-effect notes that _________a price level increases the real value of households' wealth_________.The larger real wealth the quantity of goods and services demanded

lower, increases

The Federal Reserve sets _________policy, while the president and Congress set _________policy. These two policies influence aggregate_________

monetary, fiscal, demand

Changes in aggregate demand can cause fluctuations in_________ and _________in the short run, and only_________ in the long run

output, prices, prices

Refer to Figure 4. The economy is currently at point A. Given the current situation, the Federal Reserve will _________bonds, which causes interest rates to_________ .

purchase, fall

The goal of stabilization policy is to stabilize aggregate . As a result, stabilization policy will also stabilize _____ and _____.

demand, output, employment

Refer to Figure 1. Households' desired money holdings are given by MD1. If the current rate of interest is r3, then there is excess_________ . Households will _________interest-earning assets, which causes the interest rate to .

demand, sell, rise

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

Automatic stabilizers

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with _________.

a long lag

If the Federal Reserve's goal is to stabilize aggregate demand, then it will _________the money supply in response to a stock market boom. This causes interest rates to_________

decrease, rise

The idea that aggregate demand fluctuates due to irrational waves of pessimism by households and firms is known as _____.

animal spirits

Suppose a wave of optimism causes firms to increase investment. To stabilize output and employment, the Federal Reserve will_________

decrease the money supply

Refer to Figure 3. Suppose the multiplier is 5 and the economy is currently at point A. To stabilize output at $1000, the government should _________purchases by $_________

decrease, 40

An open-market purchase by the Federal Reserve creates an excess_________ of money. This causes interest rates _________to and investment to_________ . The change in investment causes aggregate demand to shift to the

supply, fall, rise, right

When the interest rate is above equilibrium, there is excess of money_________. Households will interest- earning assets, which _________the interest rate.

supply, purchase, decreases

The _________is the most important automatic stabilizer.

tax system