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14 Cards in this Set
- Front
- Back
For US economy, the most important reason for the downward slope of the AD curve is the interest rate effect
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theory of liquidity preference
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keyens's theory that the interest rate adjusts to bring money supply and money demand into balance
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analysis of interest rate summed up in 3 steps
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1)increase P makes increase money demand
2)increase money demand makes increase interest rate 3)increase interest rate implys decrease Qd of G&S |
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whenever Qd of G&S changes for a given price level the AD curve shifts
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federal funds rate
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the interest rate that banks chare one another for short term loans
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monetary policy can be describes either in terms of the money supply or in terms of the interest rate
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mulitplier effect
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teh additional shifts in AD that result when expansionary fiscal policy increases income and thereby increases consumer spending
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investment accelerator marginal propensity to consuem (MPC)
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the fraction of extra income that a household consumes rather than saves
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govt multiplyer=
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1/(1-MPC)
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the larger the MPC is, the greater is this induced effect on consumption and the larger is the multiplier
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crowding out effect
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the off set in AD that results when expansionary fiscal policy raises the interest rate and thereby reduces investment sending
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automatic stabilizers
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changes in fiscal policy that stumulate AD when the economy goes into a recession without policymakers having to take any deliberate action
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expansionary policy
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increases money supply
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contractionary policy
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decreases money supply
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