Influence of Monetary and Fiscal Policy on Aggregate Demand

These flashcards cover key concepts relating to monetary and fiscal policy and their influence on aggregate demand.

Monetary Policy

The use of open-market operations by the central bank and interest rate adjustments to influence the money supply and aggregate demand.

Fiscal Policy

The levels of government spending and taxation set by government policymakers to influence aggregate demand.

Aggregate Demand (AD) Curve

A curve that shows the relationship between the total quantity of goods and services demanded and the price level.

Wealth Effect

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

Interest-Rate Effect

The impact that a change in interest rates has on the quantity of goods and services demanded.

Exchange-Rate Effect

The effect of currency appreciation or depreciation on the aggregate demand for a country's goods.

Liquidity Preference Theory

Keynes’s theory that the interest rate adjusts to bring the money supply and money demand into balance.

Nominal Interest Rate

The interest rate reported without adjustment for inflation.

Real Interest Rate

The interest rate adjusted for the effects of inflation.

Money Supply (MS)

The total amount of money available in an economy at a particular time, assumed to be fixed by the Fed.

Money Demand (MD)

The desire to hold wealth in liquid form, reflected in demand for money.

Marginal Propensity to Consume (MPC)

The fraction of additional income that households consume rather than save.

Multiplier Effect

The amplification of effects on aggregate demand resulting from changes in government spending or taxation.

Crowding-Out Effect

The reduction in investment spending caused by an increase in interest rates due to expansionary fiscal policy.

Automatic Stabilizers

Fiscal policy mechanisms that automatically increase spending or decrease taxes when the economy is in recession.

Active Stabilization Policy

Government use of monetary or fiscal policy to combat fluctuations in economic output and employment.

Liquidity Trap

A situation where nominal interest rates are close to zero and monetary policy becomes ineffective.