| anticipatory monetary policy | Monetary policy adopted in response to problems (i.e., inflationary pressure) that are expected to arise in the future.
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| classical case | Vertical LM curve; case in which money demand is completely insensitive to changes in the real interest rate.
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| crowding out | Reduction in some component of aggregate demand—usually
investment—that results from an increase in government spending.
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| deflation | Rate at which the price level falls, in percentage terms; opposite of inflation.
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| investment subsidy | Government payment of part of the cost of private investment.
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| investment tax credit | Tax credit given to firms when they reinvest their earnings.
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| liquidity trap | Horizontal LM curve due to extreme interest sensitivity of money demand.
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| monetary accommodation | Use of monetary policy to stabilize interest rates during
active fiscal policy operations; also the use of monetary policy to prevent a supply shock from affecting output.
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| monetizing budget deficits | Purchase of government debt by the Federal Reserve, thus indirectly funding the deficit by printing money.
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| open market operation | Federal Reserve purchase or sale of Treasury bills in exchange
for money.
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| policy mix | Combination of fiscal and monetary policy to achieve both internal and external balance.
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| portfolio disequilibrium | Occurs when people are holding more of some asset (i.e.,
money) at the prevailing interest rate than they wish to.
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| quantity theory of money | Theory of money demand emphasizing the relation of
nominal income to nominal money. Sometimes used to mean a vertical LM curve.
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| real interest rate | Return on an investment measured in dollars of constant value; roughly equal to the difference between the nominal interest rate and the rate of inflation.
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| transmission mechanism | Process by which monetary policy affects aggregate demand.
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