AS/AD
This curve shows the relationship between the price level and real GDP demanded.
What is Aggregate Demand (AD)?
Government spending and taxation policies are collectively known as this.
What is fiscal policy?
This economist argued that markets may not self-correct quickly in the short run.
Who is John Maynard Keynes?
This function of money allows it to measure value.
What is unit of account?
This institution conducts monetary policy in the United States.
What is the Federal Reserve?
A decrease in taxes shifts this curve to the right.
What is the Aggregate Demand curve?
An increase in government spending during a recession is an example of this type of policy.
What is expansionary fiscal policy?
This concept describes how increases in spending lead to larger increases in income.
What is the multiplier effect?
M1 includes currency, checkable deposits, and this additional component.
What are traveler’s checks?
Buying government securities is an example of this type of policy action.
What is expansionary monetary policy?
If input prices rise, this curve shifts left.
What is Short-Run Aggregate Supply (SRAS)?
This measures the total change in GDP resulting from an initial spending change.
What is the spending multiplier?
If MPC = 0.8, the spending multiplier equals this value.
What is 5?
If the reserve requirement is 10%, the simple deposit multiplier is this.
What is 10?
Lowering the federal funds rate typically has this effect on investment.
What is increases investment?
This occurs when output exceeds full-employment GDP, causing downward pressure on prices.
What is a recessionary gap?
Why might expansionary fiscal policy crowd out private investment?
What is: higher government borrowing raises interest rates, reducing private investment?
Why does Keynesian theory emphasize aggregate demand in determining output?
What is: because insufficient demand can lead to prolonged unemployment and unused capacity?
Explain how banks create money through lending.
What is: banks lend excess reserves, creating new deposits and expanding the money supply?
Why might monetary policy be less effective during a liquidity trap?
What is: interest rates are already near zero, so increases in money supply don’t stimulate spending?
Explain the long-run adjustment mechanism when the economy is in an inflationary gap.
What is: rising input prices shift SRAS left until equilibrium returns to potential GDP?
Compare discretionary fiscal policy and automatic stabilizers in terms of timing and effectiveness.
What is: automatic stabilizers act immediately without legislative delay, while discretionary policy is slower but more targeted?
Assess a limitation of Keynesian policy during stagflation.
What is: demand-side policies may worsen inflation without solving supply constraints?
Evaluate the risks of a banking system with very low reserve requirements.
What is: increased money creation but higher risk of bank runs and instability?
Compare monetary policy to fiscal policy in terms of speed and political constraints.
What is: monetary policy is faster and less political, while fiscal policy is slower but more direct?