Chapter 34 - The Influence of Monetary and Fiscal Policy on Aggregate Demand

small initial change

A(n) ________ in consumption, investment, government purchases, or net exports can end up having a large effect on aggregate demand and, therefore, the economys production of goods and services.

marginal propensity

The ________ to consume (MPC) is the fraction of extra income a household consumes as opposed to saving.

Multiplier effect

________: the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases capital spending.

John Maynard Keynes

________ in* The General Theory of Employment, Interest, And Money* proposed the theory of liquidity preference to explain the factors that determine the interest rate.

trap states

The liquidity ________ that expansionary monetary policy reduces interest rates and stimulates investment spending.

aggregate demand

Crowding- out effect: the offset in ________ that results when expansionary fiscal policy raises the interest rate which leads to less investment spending.

money supply

When policymakers change the ________ or tax level, it indirectly influences the aggregate- demand curve shift.

Monetary policy

________ is an important value.

Fiscal policy

________: the setting of the levels of government spending and taxation by government policymakers.

wealth effect

The ________ is the least important reason for the slope downward.

interest rate

A decrease in the ________ reduces the cost of holding money and raises the quantity demanded.

price level

The ________ is one determinant of the quantity demanded.

federal funds rate

The ________ accommodates day- to- day fluctuations.

Theory of liquidity

________ preference: Keyness theory that the interest rate adjusts to bring money supply and money demand into balance.

higher interest rate

A(n) ________ reduces the quantity of goods and services demanded.

Automatic tax cuts

________ stimulate aggregate demand and reduce economic fluctuations.

Automatic Stabilizers

________: changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession but that occur without policymakers having to take deliberate action.

investment accelerator

The ________ is the positive feedback from demand to investment.

nominal interest rate

The ________ is usually reported as such, the real interest rate is corrected for inflation.

Monetary policy

________ can be described either in terms of the money supply or in terms of the interest rate.

Money supply

________ is hard to measure with precision.

fiscal policy

The government can adjust monetary and ________ in response to the market optimism /pessimism, stabilizing the economy.

aggregate demand

When the Fed increases the money supply, it lowers the interest rate and increases the quantity of goods and services demanded for any given price level, shifting the ________ curve to the right.

money supply

When the market is pessimistic, the Fed can expand the ________ to lower interest rates and expand aggregate demand.

money supply

When they are excessively optimistic, it can contract the ________ to raise interest rates and dampen aggregate demand.