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

The ----- effect states that a lower price level reduces the amount of money people wish to hold.When they lend out their excess savings,the ----- falls causing investment spending to rise and increases the quantity of goods and services demanded.

If the Federal Reserve's goal is to stabilize aggregate demand,then in response to an increase in money demand,the Federal Reserve will ----- the money supply.

Figure 34-11 -Refer to Figure 34-11.The economy is currently at point A.To stabilize output,the president and Congress can reduce ----- and/or increase -----.

Critics of stabilization policy argue that monetary and fiscal policies affect the economy with -----.

What is the difference between monetary policy and fiscal policy?

Policymakers use ----- policy and ----- policy to stabilize ----- and ----- in the short run.

Suppose that there are no crowding-out effects and the MPC is .9.By how much must the government increase expenditures to shift the aggregate demand curve right by $10 billion?

The government's choices regarding the overall level of government purchases and taxes is known as -----.

The Federal Reserve sets ----- policy,while the president and Congress set ----- policy.These two policies influence aggregate -----.

To stabilize output,the Federal Reserve will ----- the money supply when aggregate demand falls.

Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

Suppose the Federal Reserve lowers the target on the interest rate in the Federal Funds market.The Federal Reserve will ----- the money supply and aggregate demand will -----.

Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion.Suppose that the MPC is .80 and that there are no crowding out or accelerator effects.What is the combined effects of these changes? Why is the combined change not equal to zero?

The ----- is the most important automatic stabilizer.

How does a reduction in the money supply by the Fed make owning stocks less attractive?

Figure 34-14 -Refer to Figure 34-14.Initial equilibrium exists at point A.A decline in prices will cause households to ----- their desired money holdings,moving the interest rate to -----.

The idea that aggregate demand fluctuates due to irrational waves of pessimism by households and firms is known as -----.

A decrease in the domestic ----- causes domestic goods to become less expensive relative to foreign goods and increases net exports.The increase in net exports causes a(n)----- in the quantity of domestic aggregate goods and services demanded and is known as the ----- effect.

Suppose that the government spends more on a missile defense program.What does this do to aggregate demand? How is your answer affected by the presence of the multiplier,crowding-out,taxes,and investment-accelerator effects?

Permanent tax changes have a ----- effect on aggregate demand compared to temporary tax changes.