Ch. 18 - IS-MP Analysis: Interest Rates & Outputs Flashcards
What is aggregate expenditure?
The total amount of goods & services that people want to buy across a whole economy
AE = C + I + G + NX
What is a macroeconomic equilibrium?
Occurs when the quantity of output that buyers collectively want to purchase is equal to the quantity of output that suppliers collectively produce
What is the IS curve?
Illustrates how lower real interest rates raise spending & hence GDP, leading to a more positive output gap
What is monetary policy?
The process of setting interest rates in an effort to influence economic conditions
What is a risk-free interest rate?
The interest rate on a loan that involves no risk
What is a risk premium?
The extra interest that lenders charge to account for the risk of loaning money
How do you calculate real interest rate
(with risk-free IR & risk premium)
IR = Risk-Free Interest Rate + Risk Premium
What is the MP curve?
Illustrates the current real interest rate, which is shaped by monetary policy & risk premium
What is fiscal policy?
The government’s use of spending & tax policies to attempt to stabilize the economy
What is a multiplier?
(MP curve)
A measure of how much GDP changes as a result of both the direct & indirect effects flowing from each extra dollar of spending
What are spending shocks?
Any change in aggregate expenditure at a given real interest rate & level of income. Spending shocks shift the IS curve
What are financial shocks?
Any change in borrowing conditions that changes the real interest rate at which people can borrow. Financial shocks shift the MP curve
