Chapter 14 Flashcards
What does an increase in government purchases do in the IS-LM model?
Shifts the IS curve to the right, increasing the interest rate and income
What does a decrease in taxes do in the IS-LM model?
Shifts the IS curve to the right, increasing the interest rate and income
Monetary transmission mechanism
The process by which changes in the money supply influence the amount that households and firms wish to spend on goods and services
How does increasing the money supply induce greater spending and income?
Lowers the interest rate, stimulating investment and thus the demand for goods and services
What does a movement along the aggregate demand curve represent in the IS-LM model?
A change in income resulting from a change in the price level
What does a shift in the aggregate demand curve represent in the IS-LM model?
A change in income for a given price level
Pigou effect
The increase in consumer spending that results when a fall in the price level raises real money balances and thus consumers’ wealth
Debt-deflation theory
A theory according to which an unexpected fall in the price level redistributes real wealth from debtors to creditors and, therefore, reduces total spending in the economy
Liquidity trap
A situation in which the nominal interest rate has fallen to its lower bound of zero, limiting the ability of monetary policy to further stimulate the economy
