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tells us that a change in investment spending changes equilibrium GDP more than the change in investment
automatic stabilizers reduce fluctuations in GDP by
reducing the additional spending that occurs in each round of the multiplier
output level when AE line lies below the 45-degree line
aggregate expenditure is less than output so inventories will increase and output will be lowered
what happens when quantity of money demanded exceeds the quantity of money supplied? (public bonds, price of bonds, interest rate)
public will try to sell bonds, price will decrease, and interest rate will increase til equilibrium is reached
federal funds rate
determined in a market but targeted by the Fed, the interest rate that commercial banks charge each other for very short term loans
If the Fed sells bonds, what happens to money supply?
supply decreases, interest rate increases, autonomous consumption decreases, investment decreases, and GDP decreases
aggregate demand curve
gives the equilibrium price level of real GDP corresponding to a given price level
a decrease in price level leads to
money demand curve shifts leftward, interest rate drops, AE line shifts upward, movement upward along AD curve
if gov gives a big tax cut, what will happen to AE, MD, and AD
AE line shifts upward, MD curve shifts right, and AD curve shifts right
self-correcting mechanism for a negative demand shock
a decrease in wage rates will lead to a decrease in the price level so that economy returns to full employment
with Okun's law, when cyclical unemployment increases from 2 to 3 percent, the recessionary gap increases from...
4 to 6 %
the expenditure multiplier leads to greater than one for one changes in output when autonomous consumption changes because
direct changes in spending change the income of producers which leads to additional changes in spending
automatic stabilizers do what to government spending or taxes when real output increases
decreases gov spending or increases taxes
the nominal interest rate is above the equilibrium value so MD is - than money supply, bond prices will-, and the nominal interest rate will-
less, rise, decrease
According to the AS/AD model, in the long run, expansionary monetary policy wil
increase the price level and leave real GDP unchanged
to close a recessionary gap the Fed should
buy government bonds to increase bond prices and lower interest rates, causing consumption, investment spending, and AE to increase
in reference to short-term economic fluctuations, the "trough" refers to
the low point of economic activity prior to a recovery
the smaller the MPC, the - the income-expenditure multiplier and the - the effect of a change in autonomous spending on short run eq. output
if the money supply exceeds money demand, people will - bonds which will cause bond prices to - and the nominal interest rate to- until money demand equals money supply
buy, rise, fall
the federal reserve discount rate is the rate of interest charged on loans from - to -
the Federal reserve to commercial banks
a self correcting tendency of the economy means that expansionary gaps are eventually eliminated by
a shock in the economy is a change in
spending or production that initially affects one or more sectors and then spreads throughout the whole economy
if MPC is 0/75 and investment spending increases by $200 billion, by how much will equilibrium output increase?
examples of fed actions that could decrease money supply are making open market-? (sales or purchases, effect on required reserve ratio and discount rate)
sales, increasing the required reserve ratio, and increasing the discount rate
if quantity of money demanded is less than the quantity supplied at a given interest rate, what will happen to restore the market to eq.?
public will try to buy bonds, price of bonds will increase, interest rate will fall
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