Card Set Information
Selling Cars and buying new ones. Is this an example of fiscal policy?
Yes bc the goal of the spending program was to stimulate the national economy
Which govt revenue is to increase the most in the future?
individual income taxes
Who are the baby boomers?
Ppl born from after WWII to 1965
Why should the retirement of the baby boomers cause a large increase in the growth rate of spending by the federal govt on SS?
More ppl will be collecting SS than now
The dynamic model assumes potential GDP is constantly growing while the basic model assumes it is static
In the dynamic model, expansionary policy would be used when the demands does not grow and in the basic it is used when the demand falls
If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models
Keeping real GDP at its potential using expansionary fiscal policy, what is Real GDP, Potential GDP, inflation rate and unemployment rate?
Government purchases multiplier
change in equilibrium real GDP/change in govt purchases
change in equilibrium real GDP/change in taxes
The multiplier effect
The initial increase in spending will result in rounds of "respending" resulting in a
reater effect on real GDP than the initial increase in spending
The govt purchase multiplier can have a value greater than 0 and less than 1 if
the marginal propensity to consume is negative
Why does the estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal policy
The larger the multiplier, the greater the effects of an expansionary fiscal policy
Change in govt spending
change in GDP=multiplier * change in govt spending
Why would a tax multiplier have a larger value after 2 years than after one?
Consumers are more likely to perceive the tax change as permanent and change their spending choices
If the SRAS were a horizontal line, what would the impact on the size of the govt purchases and tax multipliers?
The impact of the multiplier would be larger if the SRAS curve is horizontal
A decline in private expenditures as a result of increases in govt purchases
Diff bet crowding out in the short run and long run
In the short run, an increase in govt purchases may not cause crowding out, but they will in the long run
Describe how the govt "thirsts" for funds
The govt borrowing increases the demand for funds, causing the interest rate to rise
Why would crowding out reduce economic growth?
Increases in interest rates reduce investment, which is likely to reduce economic growth
Temporary income and permanent income and health
Temporary decrease income ppl have time to lose weight, but permanent income increase ppl have better health
What is the cyclically adjusted budget deficit or surplus?
the deficit or surplus in the fed govt's budget if the economy were at potential GDP
In a recession, what happens to tax revenues and govt expenditures?
What is the difference bet the federal budget and federal govt debt?
The federal budget is the year-to-year short fall in tax revenues (T<G+TR). The Federal debt is the accumulation of all past deficits.
A decrease in the federal govt's budget surplus can be the result of
decrease in taxes
increase in govt purchases
What is a tax wedge?
The diff. between the pretax and post tax return to an economic activity.
Ex) a tax on interest income would decrease the post tax return on investment
Benefits to a flat tax
1. Potential increases in labor supply, savings, and investment from a lower marginal tax rate
2.Reduction in paperwork and compliance cost of the tax system
The Phillip curve exhibits
the relationship bet the unemployment and the inflation rates
If price level increases over time then the average wage should increase by the same amount
The unemployment rate for the long-run phillips curve is the
natural rate of unemployment
If workers expect a higher inflation rate, the short run Phillips curve shifts
What should firms, consumers and the govt take into account when making decisions?
If the public starts seeing a higher inflation rate, the Phillips curve will shift to the
What is the Volcker disinflation?
a reduction in the inflation rate bet 1979-1989
Independent central banks are more effective at fighting
wages and prices declined very slowly during the disinflation process
Nominal interest rates are equal to
real interest rate plus expected inflation
The current account
net exports, net investment income, and net transfers
The financial account
net capital flows
Balance of payment is equal to
the current account plus the financial account
the diff bet net exports and current account is
net exports is a subcategory of the current account
The balance of payments must always equal
the surplus in the financial account means that
a country is selling more financial assets than it buys
You can have a trade deficit and a financial account deficit together if
there are other current account items that make the overall current account balance a surplus
The US trade deficit is almost always larger than the current account deficit because
the US has a surplus in the services account
An increase in US interest rates, the dollar has
to the euro?
An appreciation of the dollar is likely to lead to a current account deficit because
imports decrease and exports decrease
Income rises in Japan and speculations of the dollar will be higher, which causes the demand to
When a country's currency appreciates, it is good for who and bad for who?
the consumers and bad for the country's businesses
When a currency appreciates it does what to the price of imports and exports?
The Japanese yen has appreciated relative to the US dollar
the value of the currencies without exchange rate changes
If global sales declined in dollar terms but rose in constant currencies, what happened to the value of the dollar?
the dollar advanced against most currencies means
the dollar is worth more in purchasing power than other currencies
If there are no transfers or net investments, than net exports equals
net foreign investments
saving and investment equation in an open economy
If national saving declines and national investment does not change, then net foreign investment has
Net foreign investment was negative
investment was larger than savings
domestic investment plus net foreign investment
budget surpluses do what to public savings and low interest rates do what to foreign investment?
a govt budget deficit may lead to a current account deficit
increased domestic investment will lead to
low domestic saving causes the current account to have a
expansionary monetary policy is more effective in an open economy because
interest rate decrease also reducing the value of the dollar, which increases net exports and increases aggregate demand
expansionary fiscal policy is less effective in an open economy because
increase govt spending can increase interest rates, which increases value and crowds out net exports
a way which monetary or fiscal policy affects the domestic economy
higher interest rates cause GDP to decrease more in a open economy than a closed economy
under the gold standard, exchange rates were determined by
the relative amounts of gold in each country's currency
under bretton woods, they exchange rates were determined by
an agreement to fix the value of gold and all other currencies
the theory of purchasing power parity states that the long-run level of the exchange rate must
make it possible to buy equivalent bundles of goods in either country
the 4 determinants of exchange rates in the long run are
relative price levels, relative productivity growth, tastes, and trade barriers
country that does not use the euro?
When one currency is pegged against another its value
is fixed in terms of that currency
Why are foreign investors more likely to invest in US govt bonds than in US corporate bonds or stocks?
The are less risky
Why has globalization increased growth in the world economy?
savings around the world can be channeled into the most productive investments
if the actual rate is larger than the implied rate
implied exchange rate
local currency price/dollar price of big mac
Countries that use the euro will not be able to
set their own independent monetary policies
Why does the govt buy its own currency?
Increase the value
A weaker dollar could mean higher inflation in the US because
prices of imported goods are likely to be higher
How would a govt manipulate the currency to get an "unfair" trade advantage
the govt would undervalue the currency
devaluation and revaluation
reduction and increase in a fixed exchange rate
limitations on the flow of foreign exchange and financial investment bet countries