Chapter 21: Monetary and Fiscal Policy and Aggregate Demand
Decreases
Contractionary Monetary Policy _______ the money supply? (increases/decreases)
Money Supply
Controlled Through The FED In: > Open Market Operations > Changing The Reserve Requirements > Changing The Discount Rate
Equilibrium Interest Rate
rate at which the quantity of money demanded equals the quantity of money supplied?
Recognition Lags
takes time to determine if a recession is occurring?
Equilibrium In The Money Market
the interest rate adjusts to balance the supply and demand for money?
Crowding-Out Effect
the offset in aggregate demand that results when expansionary fiscal policy RASIES the interest rate and thereby reduces investment spending?
Falls
the quantity of goods and services demanded __________? (rises/falls)
Active Stabilization
use of fiscal policy to stimulate aggregate demand?
Expansion Monetary Policy
when the FED BUYS government bonds, it "prints new money" in order to pay for the bonds?
Increases
when the interest rate increases, the opportunity cost of holding money __________________? (Increases/Decreases)
Decreases
when the interest rate increases, the opportunity cost of the quantity of money demanded ___________________? (increases/decreases)
Price Level
determinant of the quantity of money demanded?
Theory of Liquidity Preference
Keynes's theory, that the interest rate adjusts to bring money supply and money demand into balance?
Multiplier Effect
> government INCREASES its total expenditures, the total change in equilibrium output exceeds the INCREASE in government spending > can AMPLIFY the shift in aggregate demand
Money Demand
> people choose to hold money instead of other assets that offer higher rates of return because money can be used to buy goods/services > an increase in interest rates raises the opportunity cost of holding money > the quantity of money demanded is reduced
Increases
A higher price level ______________ the quantity of money demanded for any given interest rate? (increases/decreases)
Decreases, Increases
A monetary injection by the FED ___________ interest rates and _____________ aggregate demand? (Increases/Decreases)
Increases
According to the theory of liquidity preference, if the quantity of money demanded is GREATER than the quantity supplied, the interest rate will ___________? (Increases/Decreases)
Decreases
According to the theory of liquidity preference, if the quantity of money demanded is GREATER than the quantity supplied, the quantity of money demanded ________________ (Increases/Decreases)
Increases
Expansion Monetary Policy _________ the money supply? (increases/decreases)
Higher
Higher Money Demand leads to a ______________ interest rate? (higher/lower)
Decreases, Left
If Taxes INCREASE, Consumption ______________, Aggregate Demand shifts _________? (Increase/Decrease), (Left/Right)
Decrease, Right
If the FED conducts Open-Market Operations, the money supply ___________________ and aggregate demand shifts __________? (Increase/Decrease), (Right/Left)
Increase, Left
In short run, a DECREASE in money supply causes interest rates to ________ and aggregate demand to shift __________? (Increase/Decrease), (Right/Left)
Decrease, Right
In short run, an INCREASE in money supply causes interest rates to ________ and aggregate demand to shift __________? (Increase/Decrease), (Right/Left)
Increase In Price Level, No Change in Interest Rate
What shifts money demand to the Right?
Contractionary Monetary Policy
When the FED SELLS government bonds it "takes the money" it receives in payment out of circulation?
Fall
according to liquidity preference theory, an INCREASE in the price level causes Investment to ____________? (rise/fall)
Increases
according to liquidity preference theory, an INCREASE in the price level does what to interest rate? (increases/decreases)
Right
according to liquidity preference theory, an INCREASE in the price level shifts the money demand curve ___________? (right/left)
Decreases, Increases
according to the crowding-out effect, a DECREASE in government spending ____________ the interest rate, and so __________ government spending? (increases/decreases)
Increases, Decreases
according to the crowding-out effect, an INCREASE in government spending ____________ the interest rate, and so __________ government spending? (increases/decreases)
Independent of Interest Rates
according to the theory of liquidity preference, money supply is?
Interest Rate
according to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?
Automatic Stabilization
changes in the fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action?
Implementation Lags
congress generally only adjusts tax policy annually with the people of a new budget?
Passive Stabilization
natural result of the way government revenue collection and payments occur?
