Chapter 21 key terms

Question 1

Multiplier Effect

Answer 1

The increase in final income arising from any new spending.

Example: If a government spends $1 million, the total increase in income could be greater than $1 million due to the multiplier effect.

Question 2

Marginal Propensity to Consume (MPC)

Answer 2

The proportion of additional income that a household consumes rather than saves.

Example: If MPC is 0.8, then for every additional dollar earned, 80 cents will be spent.

Question 3

Crowding Out

Answer 3

A situation where increased public sector spending leads to a reduction in private sector spending.

Question 4

Automatic Stabilizers

Answer 4

Economic policies and programs that automatically help stabilize an economy without additional government action.

Question 5

Fiscal Policy

Answer 5

Government adjustments to spending levels and tax rates to influence the economy.

Question 6

Expansionary Policy

Answer 6

A type of fiscal or monetary policy aimed at increasing economic activity.

Question 7

Contractionary Policy

Answer 7

A type of fiscal or monetary policy aimed at reducing economic activity.

Question 8

Monetary Policy

Answer 8

The process by which the monetary authority of a country controls the supply of money.

Question 9

Interest Rate Effect

Answer 9

The impact of changes in interest rates on the economy, particularly on investment and consumption.

Question 10

Liquidity Preference

Answer 10

The desire to hold cash or easily liquidated assets rather than investing them.

Question 11

Aggregate Demand Shifts

Answer 11

Changes in the total demand for goods and services in an economy at a given overall price level and in a given time period.

Question 12

Open Market Operations

Answer 12

The buying and selling of government securities in the open market to regulate the money supply.

Question 13

Tax Multiplier

Answer 13

The ratio of change in national income to the change in taxes that brought it about.