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Summary12 - 3 Can the government come up with a combination...

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CHAPTER 12 SUMMARY: 1. How can what happens in the money market possibly affect what happens to economic output, inflation, and unemployment? Changes in the money market, such as changes in interest rates, can affect the goods market by changing the interest rate. In addition, changes in the goods market, such as changes in aggregate output, can affect the money market by changing the demand for money. 2. If the government tries to stimulate the economy, will changes in the money market help or hurt? Fiscal and monetary policies are made less effective as a result of changes in the money market. For expansionary policies, the increase in aggregate output raises the demand for money, which raises interest rates and reduces investment. This tends to reduce or lessen the increase in real GDP. Changes in the money market also lessen the effectiveness of contractionary policies.
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Unformatted text preview: 3. Can the government come up with a combination of policies that will make the recovery from a recession more rapid? Actions by the Fed can increase the effectiveness of fiscal policy. For example, if the government cuts taxes or increases spending in order to stimulate the economy, the Fed can simultaneously increase the money supply to keep the interest rate from increasing as the economy expands. 4. What are "animal spirits" and what do they have to do with investment? Lots of factors affect the level of planned investment. One of the most important is the interest rate. Other factors include capital utilization rates, relative capital and labor costs, and expectations about the future of the economy and future sales. Keynes used the term "animal spirits" to describe the expectations of business owners about the future....
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