Macroecon Ch 21

Front 1

Monetary Policy

Back 1

the supply of money set by the central bank

Front 2

Fiscal Policy

Back 2

the levels of government spending and taxations set by the president and Congress

Front 3

The Wealth Effect

Back 3

- a lower price level raises the real value of households' money holdings, which are part of their wealth
-higher real wealth stimulates consumer spending and thus increase the quantity of goods and services demanded

Front 4

The Interest-Rate Effect

Back 4

-A lower price level reduces the amount of money people want to hold
- as people try to lend out their excess money holdings, the interest rate falls
- the lower interest rate stimulates investment spending and increases the quantity of goods and services demanded

Front 5

The Exchange Rate Effect

Back 5

-when a lower price level reduces the interest rate, the investors move some of their funds overseas in search of higher returns
-this movement in funds causes the real value of the domestic currency falls in the market for foreign goods
- this change in real exchange rate stimulates spending on net exports and thus increases the quantity of goods and services demanded

Front 6

The theory of Liquidity Preference

Back 6

Keyenes's theory that interest rate adjusts to bring money supply and money demand into balance