Theory of Liquidity Preference

  • Definition: Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance.
  • What It Means:

Fiscal Policy

  • Definition: The setting of the level of government spending and taxation by government policymakers.
  • What It Means:

Multiplier Effect

  • Definition: The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.
  • What It Means:

Crowding-Out Effect

  • Definition: The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending.
  • What It Means:

Automatic Stabilizers

  • Definition: Changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action.
  • What It Means:

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