Economics Chapter 12

Question 1

Goods market

Answer 1

market where goods & services are exchanged & aggregate output equilibrium level is determined

Question 2

Money Market

Answer 2

market in which financial instruments are exchanged & equilibrium level of interest rate is determined

Question 3

Connecting the Goods & Money Markets

Answer 3

-linked by interest rate. Fed changes MS = change in interest rate = affect in aggregate demand

Question 4

aggregate demand curve

Answer 4

curve showing negative relationship between aggreagte output (income) & the price level. Each point on AD curve is point where goods market & money market are in equilibrium

Question 5

determinants of planned investment

Answer 5

• interest rate, higher=less borrowing=lower level of planned investment spending
• downward sloping demand curve = marginal efficiency of investment curve

Question 6

effects of change in interest rate

Answer 6

= change in planned investment = change in AE (AE=C+I+G)
-interest rate up = investment & AE down, & lower equilibrium output (income) (Y) by the initial decrease in planned investement

Question 7

effects of Money demand

Answer 7

Y increases, then Money demand increases & since money demanded is more than money supplied the interest rate increases

Question 8

expansionary fiscal policy

Answer 8

increase in gov’t spending or reduction in taxes to increase aggregate outcome (Y)

Question 9

expansionary monetary policy

Answer 9

increase in the money supply to increase aggregate output (income) (Y)

Question 10

crowding out effect

Answer 10

the tendency for increases in gov’t spending to cause reductions in private investment spending

Question 11

sensitivity or insensitivity of planned investment

Answer 11

how planned investment responds to changes in interest rate

• interest sensitivity = increst rate changes planned investment spending changes a great deal
• interest insensitivity = interest rate changes & planned investment has little or no change

Question 12

Effects of Expansionary fiscal policy

Answer 12

G ↑, Y ↑, Money Demand ↑, r↑, I↓

Question 13

Effects of expansionary monetary policy

Answer 13

Money supply ↑, r↓, I↑, Y↑, Money demand ↑

• increase in MS pushes down interest rate which causes planned investment to rise which increases planned aggregate expenditure = increased output = increased Y = increased money demand
• in order for the policy to be successful the investment must be sensitive

Question 14

contractionary fiscal policy

Answer 14

-decrease in gov’t spending or increase in net taxes to decrease aggregate output (income) (Y)

Question 15

effects of contractionary fiscal policy

Answer 15

-G↓ or T↑ = Y↓, Md↓, r↓, I↑

Question 16

contractionary monetary policy

Answer 16

decrease in the money supply to decrease aggregate output (income)

Question 17

effects of contractionary monetary policy

Answer 17

Ms↓, r↑, I↓, Y↓, Md↓

Question 18

policy mix

Answer 18

-combination of monetary & fiscal policies in use at a given time

Question 19

expansionary fiscal + contractionary monetary

Answer 19

favors gov’t spending over investment spending

-increases gov’t spending & reduces moneys supply

Question 20

aggregate demand curve

Answer 20

negative relationship between aggregate output (income) and the price level - each point on the curve is a pt of equilibrium in goods & money markets
-p increases money demand curve shits right & interest rate increases

Question 21

real wealth/real balance effect

Answer 21

change in consumption brought about by a change in real wealth that results from a change in the price level