Chapter 12: Combining Goods and Services Market

Question 1

Planned investment and the interest rate are

Answer 1

Inverses
If r increases, I decreases
If r decreases, I increases

Question 2

2 links between the goods and services market and the money market

Answer 2

Link 1: Goods and services market determines Y, money demanded Md depends on Y. If Y increases Md increases
Link 2: The money market determines change in r which changes I in the goods and services market

Question 3

Expansionary fiscal policy

Answer 3

An increase in government spending (G up) or a reduction in net taxes (T down) aimed at increasing output (Y up)

Question 4

Expansionary monetary policy

Answer 4

An increase in the money supply (Ms up) aimed at increases output (Y up)

Question 5

Crowding out effect

Answer 5

The tendency for increases in government spending to cause reductions in private investment spending
- G up, Y up, Md up, r up, I down

Question 6

Contractionary fiscal policy

Answer 6

A decreases in government spending (G down) or an increase in net taxes (T up) aimed at decreasing output (Y down)

Question 7

Contractionary monetary policy

Answer 7

An decrease in the money supply (Ms down) aimed at decreasing output (Y down)

Question 8

Aggregate demand curve

Answer 8

Curve that shows the negative relationship between aggregate output (Y) and the price level (P)

Question 9

Interest sensitivity or insensitivity of planned investment

Answer 9

The responsiveness of planned investment spending to change the interest rate

• Interest sensitivity = Planned investment spending changes a great deal in response to the interest rate
• Interest insensitivity = Little or no change in planned investment as a result of changes in the interest rate

Question 10

Glass Steal Act

Answer 10

Separated commercial and investment banking

Question 11

Gramm Leach Biley Act

Answer 11

• Deregulatory act, repeal of the glass steal act under Clinton
• Eliminated wall between investment and commercial banking, allowed banks to do both commercial an investment banking

Question 12

Dodd Frank

Answer 12

• Obama, deregulatory act
• Decreased risks in financial system, response to 2008 recession
• Created new government agencies
• Placed more regulations on banks
• Banks had to pass stress tests (is the bank big enough to withstand a downturn/recession?)

Question 13

Leaning against the wind

Answer 13

Expansionary fiscal policy (G up or T down) plus + contractionary monetary policy (Ms down)

Question 14

Yield Curve

Answer 14

Reflects the difference between shorter and longer-term U.S. borrowing rates.
- The short term bond pays less than the long term bond (in a regular yield curve, inverse is opposite)

Question 15

Inverse Yield Curve

Answer 15

Long term bond is paying less to investors than short term bond