Macro Vocab Ch. 16

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1

Theory of Liquidity Preference

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance.

2

Fiscal Policy

the setting of the level of government spending and taxation by government policymakers.

3

Multiplier Effect

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.

4

Crowding-out Effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending.

5

Automatic Stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policy markers having to take any deliberate action.