11 Monetary and Fiscal Policy, Mankiew 34
Terms in this set (8)
The aggregate demand curve slopes downward for three reasons (Repetition)
1.) The wealth effect
2.) The interest effect
3.) The exchange rate effect
The wealth effect (Repetition)
A lower price level raises the real value of households' money holdings, and higher real wealth stimulates consumer spending.
The interest effect (Repetition)
A lower price level lowers the interest rate as people try to lend out their excess money holdings, and the lower interest rate stimulates investment spending.
The exchange effect (Repetition)
When a lower price level lowers the interest rate, investors move some of their funds overseas and cause the domestic currency to depreciate relative to foreign currencies. This depreciation makes domestic goods cheaper compared to foreign goods and, therefore, stimulates spending on net exports.
Theory of liquidity preference
Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance.
the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
the offset in aggregate demand that results wehn expansionary fiscal policy raises the interest rate and thereby reduces investment spending
When the government increases its purchases by £10 billion, the aggregate demand for goods and services could rise by more or less than £10 billion, ...
depending on whether the multiplier effect or the crowding-out effect is lager.
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