According to the text, in many respects, the single most power economic policymaker in the US is
The federal reserve
What are monetary policy goals?
Keep unemployment rates low
prevent high rates of inflation
The monetary policy tool that involves the buying and selling of government bonds is
Expansionary monetary policy
when the economy is in recession and unemployment is a problem. The goal of expansionary monetary policy is to reduce unemployment. Therefore the tools would be an increase in the money supply. To increase the money supply the federal government can: Buy government bonds(open market purchase) Lower the interest rate Lower the reserve ratio
Contractionary monetary policy
when economy is in expansion and inflation is a problem. The goal of contractionary monetary policy is to reduce inflation. Therefore the tool would be the decrease in the money supply. To decrease the money supply the federal reserve can: Sell government bonds(an open market sell) Raise the interest rate Raise the reserve ratio
If the economy experiences a recessionary gap. Expansionary monetary policy will ___ real GDP and ___ price level.
When the Fed sells bonds in the open market, we can expect
Bon prices to fall and interest rates to rise.
Change in the money supply brough about by an open market purchase will...
Lower interest rate, lower exchange rate, increase demand for investment and net exports
High interest rates in the US would ___ the demand for US dollars in the foreign exchange market. In turn, this will lead to a(n) ___ in the exchange rate, and US net exports would ____
Increase; increase; fall
If inflation is a threat, Fed will conduct monetary policy aimed at ___ the interest rate which will then shift AD to the ____.
Instruments of fiscal policy
rebate on payroll taxes, education tax credits, unemployment insurance benefits
The government purchases compenet of aggregate demand includes
All purchases by government agencies of goods and services produced by firms
direct production by government agencies
Public investment expenditure for highways, schools, and national defense is included in which component of GDP?
Payments to households that do not require anything in exchange are called
Medicade, welfare payments, and temporary assistance to needy families are
Transfer payments typically
Fall during expansionary periods and rise during recessionary periods
Government has a budget surplus if
its total revenues are greater than its total expenditures
The sum of all past federal deficits minus any surpluses is called
If the federal budget is initially balanced and government expenditures remain constant, then an increase in GDP will ___ tax revenues and create a budget ____
How do you calculate national debt?
Debt minus surplus
Personal income taxes and transfer payments
Act as automatic stabilizers
A transfer payment that rises automatically during a recession is
During an expansion, what occurs because of automatic stabilizers?
Income tax revenues tend to rise
The government's budget deficit tends to fall or its budget surplus tends to rise
Changes in expenditures and taxes that occur through automatic stabilizers
Do not shift the AD curve
Discretionary fiscal policy refers to
Deliberate government efforts to stabilize the economy through government spending and taxes
What's the difference between fiscal and monetary policy?
Fiscal policy is government action
Monetary is the Fed action
Contractionary fiscal policy includes
increasing taxes and decreasing government expenditures
Expansionary fiscal policy shifts the AD curve
to the right and is used to close recessionary gap
An inflationary gap can be closed with
using a policy action such as a reduction in government purchases
implementation lag for discretionary fiscal policy
the time it takes to secure bureaucratic approval for policy actions
An expanionary fiscal policy is likely to
increase borrowing by the Treasury through the sale of bonds
Expansionary fiscal policy leads to
higher interest rates which increase the demand for a nation's currency, and causes its exchange rate to rise
The term "crowding out" refers to the phenonmenon that occurs when increased government spending
leads to interest rates which reduces private investments
When government finances its spending with taxes, and crowds out smaller businesses with less money
Historical relationship between inflation and unemployment
Stagflation, recovery, philips cycle
Understanding Philips Curve
Increasing inflation means unemployment goes down (inversely related)
Policies to move along Philips curve
A to B - Contractionary policy (examples of)
B to A - Expansionary policy (examples of)
Reasons for structural unemployment
New trade, comparative advantage
New technology, like fast trak
Changes in consumer preferences
Economy will fix itself
long run - everyone is dead
increase money supply at a steady rate, to allow for growth. GDP to go up, not as a policy for stabilization, just to keep up with increasing output.