Influence of Monetary and Fiscal Policy on Aggregate Demand

These flashcards cover key vocabulary and concepts related to the influence of monetary and fiscal policy on aggregate demand, derived from macroeconomic principles.

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Monetary Policy

The process by which the central bank (e.g., the Fed) manages the money supply and interest rates to influence economic activity.

Fiscal Policy

The use of government spending and taxation to influence the economy.

Wealth Effect

A phenomenon where a decrease in the price level increases the real value of household wealth, leading to an increase in consumption and aggregate demand.

Interest Rate Effect

A concept that explains how changes in the price level affect interest rates, which in turn influence investment spending and aggregate demand.

Exchange Rate Effect

The impact on net exports as a result of changes in the price level affecting exchange rates, which subsequently influences aggregate demand.

Theory of Liquidity Preference

A theory that suggests the interest rate is determined by the supply and demand for money.

Multiplier Effect

The concept that an increase in fiscal spending leads to a larger increase in national income and consumption due to subsequent rounds of spending.

Crowding-Out Effect

An economic phenomenon where increased government spending leads to a reduction in private sector spending or investment.

Automatic Stabilizers

Economic policies and programs that automatically counteract fluctuations in economic activity without deliberate action from policymakers.

Zero Lower Bound

The situation in which the central bank's nominal interest rate is at or near 0%, limiting the effectiveness of standard monetary policy to stimulate the economy.

Marginal Propensity to Consume (MPC)

The fraction of additional income that a household consumes rather than saves.