Mankiw Brief Principals of Economics Chapter 16
Multiplier Equation
1/(1-MPC)
If the MPC = 3/5, then the government purchases multiplier is...
5/2.
What shifts the aggregate demand to the left?
a decrease in the money supply
Wealth Effect
a lower price level raises the real value of households' money holdings.
Interest Rate Effect
a lower price level reduces the amount of money people want to hold.
What shifts money demand right?
an increase in the price level but not an increase in the interest rate
Keynes used the term animal spirits to refer to...
arbitrary changes in attitudes of household and firms.
Automatic stabilizers...
are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
Opponents of active stabilization policy...
believe that the political process creates lags in the implementation of fiscal policy.
When the interest rate decreases, the opportunity cost of holding money...
decreases, so the quantity of money demanded increases.
Exchange Rate Effect
when a lower price level reduces the interest rate, investors move some of their funds overseas in search of higher returns.
Fiscal policy refers to the idea that aggregate demand is changed by changes in...
government spending and taxes.
What policies would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?
increase government expenditures
Open-market purchases...
increase investment and real GDP.
In the short run, a decrease in the money supply causes
increase, and aggregate demand to shift left.
If taxes...
increase, consumption decreases, aggregate demand shifts left.
If the Fed conducts open-market purchases, the money supply
increases and aggregate demand shifts right.
According to the crowding-out effect, an increase in government spending...
increases the interest rate and so decreases investment spending.
Assume that the MPC is 0.75. Assuming that only the multiplier effect matters, a decrease in government purchases of $10 billion will shift the aggregate demand curve...
left by $40 billion.
Increase in the price level shifts the money demand curve...
right.
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.
A decrease in government spending initially and primarily shifts...
the aggregate demand left.
The lag problem associated with monetary policy is due mostly to...
the fact that business firms make investment plans far in advance.
The government buys a bridge. The owner of the company that builds the bridge pays her workers. The workers increase their spending. Firms that the workers buy goods from increase their output. This type of effect on spending illustrates...
the multiplier effect.
The Aggregate Demand Curve shows...
the total quantity of goods and services demanded in the economy for any price level.
