Exam 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand: Part B

If the MPC is 4/5,the multiplier is 5/4.

The automatic stabilizers in the U.S.economy are sufficiently strong to prevent recessions.

A significant lag for monetary policy is the time it takes to for a change in the money supply to change the economy.A significant lag for fiscal policy is the time it takes to pass legislation authorizing it.

In liquidity preference theory,an increase in the interest rate,other things the same,decreases the quantity of money demanded,but does not shift the money demand curve.

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand.

According to the theory of liquidity preference,the interest rate adjusts to balance the supply of,and demand for,loanable funds.

When the Fed announces a target for the federal funds rate,it essentially accommodates the day-to-day fluctuations in money demand by adjusting the money supply accordingly.

Other things the same,an increase in taxes shifts aggregate demand to the left.In the short run this makes output fall which makes the interest rate rise.

If the inflation rate is zero,then the nominal and real interest rate are the same.

Unemployment insurance and welfare programs work as automatic stabilizers.

One of President Obama's first policy initiatives was a stimulus bill that included large increases in government spending.

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

An increase in the money supply decreases the interest rate in the short run.

In principle,the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

According to the IGM poll,most economists think that the benefits of ARRA exceeded the costs.

When the Fed increases the money supply,the interest rate decreases.This decrease in the interest rate increases consumption and investment demand,so the aggregate-demand curve shifts to the right.

During recessions,unemployment insurance payments tend to rise.

During a recession unemployment benefits rise.This rise in benefits makes aggregate demand higher than otherwise.

Sometimes,changes in monetary policy and/or fiscal policy are intended to offset changes to aggregate demand over which policymakers have little or no control.

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding.