ECO3200 Chap 11

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18 Terms

1

Interest Rates

Represent the cost of borrowing money; affect aggregate spending and investment demand.

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2

IS-LM Model

A core model in short-run macroeconomics that shows the relationship between interest rates and output in the goods and money markets.

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3

Investment Function (I=I̅-bi)

A function where I is the level of investment, I̅ is autonomous investment, b is the responsiveness of investment to interest rates, and i is the interest rate.

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4

IS Curve

A curve that shows combinations of interest rates and output levels where planned spending equals income.

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5

AD Shift

A change in aggregate demand, which occurs when there's an increase in interest rates, causing a leftward shift in the AD curve.

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6

Marginal Propensity to Consume (c)

The percentage of additional income that people will spend on consumption.

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7

Demand for Money (L=kY-hi)

A formula that reflects the demand for real money balances, dependent on real income (Y) and interest rate (i).

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8

LM Curve

A curve that shows combinations of interest rates and output levels where money demand equals money supply.

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9

Autonomous Spending

Expenditures that are independent of current income levels; depicted as A̅ in the IS-LM model.

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10

Equilibrium in the Money Market

Occurs when the quantity of money demanded equals the quantity of money supplied, resulting in the LM curve.

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11

Slope of the IS Curve

Determined by how responsive investment spending is to changes in interest rates and the multiplier effect.

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12

Real Money Supply

The amount of money in circulation adjusted for the price level, denoted as M̅/P̅.

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13

Effect of an Increase in Money Supply

Shifts the LM curve down and right, leading to lower interest rates and higher income levels.

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14

Equilibrium Levels of Income and Interest Rate

Change when either the IS or LM curve shifts, impacting the overall economy.

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15

Downward Sloping IS Curve

Illustrates the negative relationship between the interest rate and output (Y) for a given level of autonomous spending.

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16

Inverse Relationship Between Money Demand and Interest Rates

As interest rates increase, the quantity of money demanded decreases.

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17

Equilibrium Point in the Money Market (E)

Where the demand for real balances equals the supply of money, represented as a point on the LM curve.

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18

Sensitivity of Investment Spending

How responsive investment is to changes in interest rates, affecting the slope of the IS curve.

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