Monetary and Fiscal Policy on Aggregate Demand

These flashcards cover essential terms and concepts related to the influence of monetary and fiscal policy on aggregate demand as discussed in the lecture notes.

Monetary Policy

The process by which the central bank controls the money supply, often through open-market operations and interest rates.

Fiscal Policy

Government policy regarding taxation and spending to influence the economy.

Aggregate Demand (AD) Curve

A curve that shows the total quantity of goods and services demanded across all levels of the economy at a given price level.

Interest-Rate Effect

The mechanism by which a change in interest rates affects the quantity of goods and services demanded.

Wealth Effect

The change in consumer spending that results from changes in perceived wealth.

Theory of Liquidity Preference

Keynes's theory that the interest rate adjusts to balance the money supply and demand.

Nominal Interest Rate

The interest rate that is typically reported, not adjusted for inflation.

Real Interest Rate

The interest rate that is adjusted for inflation.

Multiplier Effect

The phenomenon whereby a change in fiscal policy causes a larger change in aggregate demand.

Crowding-Out Effect

The reduction in private investment that occurs when government spending increases, leading to higher interest rates.

Marginal Propensity to Consume (MPC)

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

Automatic Stabilizers

Fiscal mechanisms that automatically adjust spending and taxes in response to economic conditions without explicit government intervention.

Liquidity Trap

A situation where interest rates are low and savings rates are high, rendering monetary policy ineffective.

Forward Guidance

An economic policy tool where the central bank provides information about its future policy intentions to influence market expectations.

Quantitative Easing

A monetary policy where the central bank buys longer-term securities from the open market to increase money supply.

Aggregate Supply (AS)

The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Active Stabilization Policy

Government policies aimed at reducing economic fluctuations and stabilizing output.