chapter 21 don

A comprehensive set of vocabulary flashcards pertaining to the concepts of monetary and fiscal policy and their influence on aggregate demand.

Monetary Policy

The actions of a central bank, like the Federal Reserve, to control the money supply and interest rates in the economy.

Fiscal Policy

Government policy regarding taxation and spending, which can influence economic conditions.

Aggregate Demand (AD) Curve

A graph that shows the relationship between the overall price level in the economy and the total quantity of goods and services demanded.

Wealth Effect

The phenomenon where an increase in the value of assets leads to increased consumer spending.

Interest-Rate Effect

The effect that changes in interest rates have on the quantity of goods and services demanded.

Exchange-Rate Effect

A situation where a change in the exchange rate affects the price of exports and imports, influencing aggregate demand.

Liquidity Preference Theory

Keynes's theory explaining that the interest rate adjusts to bring the supply and demand for money into equilibrium.

Nominal Interest Rate

The interest rate before adjustment for inflation; the rate typically reported.

Real Interest Rate

The nominal interest rate adjusted for the effects of inflation.

Multiplier Effect

The concept that an initial change in spending will lead to further changes in income and consumption, thereby amplifying the original effect.

Marginal Propensity to Consume (MPC)

The fraction of additional income that a household will consume rather than save.

Crowding-Out Effect

A reduction in private investment caused by higher interest rates that result from increased government spending.

Automatic Stabilizers

Economic policies and programs that automatically help stabilize the economy without needing active intervention from policymakers.

Liquidity Trap

A situation in which monetary policy becomes ineffective because the nominal interest rate is at or near zero.

Interest Rate Targeting

The strategy of a central bank to influence the economy by setting a target for interest rates.

Open-Market Operations

The buying and selling of government bonds by the central bank to influence the money supply.

Fiscal Stimulus

An increase in government spending and/or a decrease in taxes designed to boost economic activity.

Economic Stabilization

Government actions aimed at minimizing economic fluctuations and maintaining a stable economy.

Active Stabilization Policy

Government policies that actively attempt to manage economic fluctuations through interventions in fiscal and monetary policy.

Animal Spirits

A term coined by Keynes to describe the instincts, proclivities, and emotions that influence human behavior in economic decision-making.

Expansionary Policy

Policy measures, particularly fiscal and monetary, aimed at increasing economic activity.

Contractionary Policy

Policy measures aimed at reducing economic activity, typically through higher taxes and lower government spending.