Term
| Theory of liquidity preference |
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Definition
| theory that interest rate adjusts to bring money supply and money demand into balance |
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Term
| Equilibrium interest rate |
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Definition
| quantity of money demanded exactly balances the amount supplied |
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Definition
| setting the level of government spending and taxation by policymakers |
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Definition
| shifts in aggregate demand that come when expansionary fiscal policy increases income, increasing consumer spending |
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Term
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Definition
| positive feedback from demand to investment |
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Term
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Definition
| while increases in government purchases increases demand for goods and services, it also causes interest rates to increase, decreasing investment spending, in turn putting downward pressure on aggregate demand |
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Term
| Marginal propensity to consume (MPC) |
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Definition
| the fraction of extra income that households consume rather than save ex: ¾ MPC - every dollar made, .75 spent and .25 saved |
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Term
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Definition
| changes in fiscal policy stimulating aggregate demand when the economy hit’s a recession, without policy makers having to take deliberate action |
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Term
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Definition
| short run trade-off between inflation and unemployment |
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Term
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Definition
| measures how much people expect the overall price level to change |
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Term
| Unemployment rate formula |
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Definition
| Unemployment rate = natural rate of unemployment - a (actual inflation - expected inflation) |
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Term
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Definition
| the claim that unemployment eventually returns to its normal or natural rate regardless of inflation |
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Term
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Definition
| an event that directly alters a firms costs and prices, shifting the economies aggregate supply curve and thus the Phillips curve |
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Term
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Definition
| the number of percentage points of annual output lost in process of reducing inflation by 1% |
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Term
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Definition
| the theory that people use all the information they have when forecasting the future |
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Term
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Definition
| lower price level raises real value of household’s money holding, raising their wealth. Higher real wealth results in increase in consumer spending = increase in goods and services demanded |
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Term
| The Interest Rate Effect: |
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Definition
| lower price level reduces amount of money people hold. As people try to lend out excess money holdings, interest rate falls. Lower interest rates - stimulates investment spending = increase in goods and services demanded |
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Term
| The Exchange Rate Effect: |
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Definition
| when lower price level reduces interest rate, investors move funds overseas in search of higher returns. Movement of funds - real value of domestic currency to fall in foreign-currency exchange. Domestic goods less expensive than foreign - stimulates net export spending = increase in goods and services |
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Term
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Definition
| Shows the number of goods and services that household, firms, government, and customers abroad want to purchase at each price level |
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Term
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Definition
| Quantity of goods and services that companies chose to produce and sell at each price level |
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Term
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Definition
| production of goods and services that economy achieves when unemployment is at its natural rate |
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Term
| Short-run Aggregate Supply |
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Definition
| decrease in price level = decrease in quantity of output, this can be from sticky wages and prices |
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Term
| Quantity of Output Supplied Formula |
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Definition
| Quantity of output supplied = natural rate of output + A (actual price level - expected price level) |
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Term
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Definition
period of falling output and rising prices
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Term
Three reasons the aggregate-demand curve slopes downward: |
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Definition
| The wealth effect, the interest rate effect, the exchnage rate effect |
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