ECON CH 12 Flashcards Preview

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Flashcards in ECON CH 12 Deck (15):
1

money market

is the market in which:
-financial instruments (cash, bonds, etc.) are exchanged
-the equilibrium level of the interest rate is determined

2

monetary policy

is used to change the level of interest rate

3

the goods and services market

is the market where:
-goods and services are exchanged
-equilibrium level of aggregate output (Y) is determined

4

fiscal policy

is used to change the level of output (Y) and unemployment

5

investment

the interest rate (determined in the money market) determines what

6

investment functions

the inverse relationship between investment and interest rate

7

expansionary fiscal policies

-an increase in gov spending
or
-reduction in net taxes
aimed at increase aggregate output (income)(Y) and lowering unemployment (u)

8

expansionary monetary policies

is an increase in the money supply aimed at increasing aggregate output and lowing unemployment

9

monetary policy

can only be effective only if investment changes when interest rate changes

10

effectiveness of monetary policy

depends on the slope of the investment function

11

monetary policy is ineffective

if interest functions is nearly vertical then little responsiveness of investment to interest rate

12

contractionary fiscal policy

-a decrease in gov spending
or
-an increase in taxes
aimed at reducing inflation

13

contractionary monetary policy

is an decrease in the money supply aimed at reducing inflation

14

crowding out

the decrease in investment brought about by the increased interest rate

15

1. the quantity of MS by fed
2. sensitivity of planned investment

the size of crowding out depends on 2 things