Chapter 8

Question 1

stabilization function

Answer 1

attempts by government to minimize fluctuations in overall

macroeconomic activity.

Question 2

Fiscal Policy

Answer 2

Government policies related to spending and revenue generation

Question 3

Monetary Policy

Answer 3

Government policies which determine a nation’s Money Supply

Question 4

Expansionary Fiscal Policy

Answer 4

increases in government spending or decreases in

taxes with the aim of stimulating overall economic activity

Question 5

Contractionary Fiscal Policy

Answer 5

decreases in government spending or increases in

taxes with the aim of dampening overall economic activity

Question 6

Crowding Out

Answer 6

decreases in private spending that occur following increases in
government spending

Question 7

money supply

Answer 7

– the amount of money in circulation in an economy (denoted M )

Question 8

velocity of money

Answer 8

– the number of times that a typical dollar is used in market
transactions in a single year (denoted V )

Question 9

overall price level

Answer 9

the “average” of all the prices of goods/services traded (denoted
P )

Question 10

aggregate level of output

Answer 10

a measure of the real quantity of goods/services

produced (denoted Q )

Question 11

Equation of Exchange

Answer 11

an identity which relates the money supply, velocity of

money, overall price level, and aggregate level of output to each other: MV = PQ

Question 12

loanable funds market

Answer 12

the collection of all markets in which lenders and
borrowers interact (e.g., mortgage markets, auto loan markets, consumer credit
markets, business loan markets)

Question 13

expansionary monetary policy

Answer 13

– an increase in the money supply which provides a
short term stimulus to the macro-economy, resulting in higher levels of output,
employment, and incomes

Question 14

contractionary monetary policy

Answer 14

a decrease in the money supply which dampens
overall economic activity, resulting in lower levels of output, employment, and
incomes in the short term (but greater stability in the long term)

Question 15

central bank

Answer 15

entity which has the ability to alter the money supply of an economy

The Fed

Question 16

fractional reserve banking system

Answer 16

a system in which at any point in time a

deposits

Question 17

3x Monetary Policy of Fed

Answer 17

1.) open market operations – buying and selling of U.S. Treasury debt securities to
and from the public

2.)setting of reserve requirements – minimum restrictions on the amount of money
that a bank must keep on hand at any point in time, in the form of either cash in its
vault or deposits with the central bank

3.)setting of discount rate – setting the interest rate that the Fed charges banks on
short-term loans