Exam 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: Part B

If the marginal propensity to consume is 6/7,then the multiplier is 7.

An essential piece of the liquidity preference theory is the demand for money.

Other things the same,an increase in the price level causes the real value of the dollar to fall in the market for foreign-currency exchange.

The multiplier is computed as MPC / (1 - MPC).

Some economists,called supply-siders,argue that changes in the money supply exert a strong influence on aggregate supply.

If the government faced a balanced budget rule,it would be forced to raise taxes or decrease spending during a recession.

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

A severe problem that many economists have with the active use of monetary policy and fiscal policy to stabilize the economy is that,while those policies obviously work well in practice,they are not well understood on a theoretical level.

An implication of the Employment Act of 1946 is that the government should respond to changes in the private economy to stabilize aggregate demand.

The theory of liquidity preference was developed by Irving Fisher.

Stock prices often rise when the Fed raises interest rates.

According to the IGM poll,most economists think that the crowding out effects were stronger than the stimulative effects of ARRA.

An increase in the money supply decreases the equilibrium interest rate and shifts the aggregate-demand curve to the right.

Other things equal,the higher the price level,the higher is the real wealth of households.

Depending on the size of the multiplier and crowding-out effects,the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.

For the U.S.economy,the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

Changes in monetary policy aimed at reducing aggregate demand involve decreasing the money supply or increasing the interest rate.

For a country such as the U.S. ,the wealth effect exerts a very important influence on the slope of the aggregate-demand curve,since U.S.wealth is large relative to wealth in most other countries.

An increase in the money supply shifts the aggregate-supply curve to the right.