chap 21 (final) Flashcards
(23 cards)
theory of liquidity preference
simple theory of the interest rate (r), adjusts to balance supply and demand for money
money demand
how much wealth people want to hold in liquid form
what variables influence money demand?
Y (GDP, income), r (theory of interest rate), and P (price level)
when people want more g&s, what happens to MD?
it increases, if they want more g&s, they need more money in liquid form, they sell bonds
change in r
shifts MD, MS is vertical
how does the fed achieve macroeconomic goals?
use monetary policy to shift the AD curve
federal funds rate
a rate the fed targets, the rate that banks charge each other on short-term loans
how does money supply increase affect r (interest rate)
money supply increase decreases r
a decrease in r does what to g&s demanded
increases quantity of g&s demanded
liquidity trap
when the interest rate is zero
how does liquidity trap affect monetary policy?
monetary policy may not work since nominal interest rates cannot be reduced further
fiscal policy
the setting of the level of gov’t spending and taxation by gov’t policy makers
expansionary fiscal policy
an increase in G and/or decrease in T
how does expansionary fiscal policy shift AD?
shifts right
contractionary fiscal policy
a decrease in G and/or increase in T
contractionary fiscal policy shifts the AD curve
left
the multiplier effect
the additional shifts in AD that result when fiscal policy increases income and thereby increases consumer spending
marginal propensity to consume (MPC)
the fraction of extra income that households consumer rather than save
deltaY = (equation)
(1/(1 - MPC) x deltaG
the crowding out effect
the size of the AD shift may be small than the initial fiscal expansion, r increases, investment decreases, AD decreases
changes in taxes
tax cut increases take home pay, they spend more money, AD shifts to right
another factor: permanent or temporary? permanent has a bigger increase in C
an incentive to give workers to work more shifts
AS to the right
ex. tax cut
automatic stabilizers
changes in fiscal policy that stimulate agg demand when economy goes into recession, without policymakers having to take any deliberate action
