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tsciole
on FreezingBlue Flashcards.
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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
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Which govt revenue is to increase the most in the future?
individual income taxes
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Who are the baby boomers?
Ppl born from after WWII to 1965
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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
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The dynamic model assumes potential GDP is constantly growing while the basic model assumes it is static
True
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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
True
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If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models
True
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Keeping real GDP at its potential using expansionary fiscal policy, what is Real GDP, Potential GDP, inflation rate and unemployment rate?
higher/the same/higher/lower
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Government purchases multiplier
change in equilibrium real GDP/change in govt purchases
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Tax Multiplier
change in equilibrium real GDP/change in taxes
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The multiplier effect
The initial increase in spending will result in rounds of "respending" resulting in a greater effect on real GDP than the initial increase in spending
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The govt purchase multiplier can have a value greater than 0 and less than 1 if
the marginal propensity to consume is negative
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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
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Change in govt spending
change in GDP=multiplier * change in govt spending
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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
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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
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Crowding Out
A decline in private expenditures as a result of increases in govt purchases
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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
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Describe how the govt "thirsts" for funds
The govt borrowing increases the demand for funds, causing the interest rate to rise
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Why would crowding out reduce economic growth?
Increases in interest rates reduce investment, which is likely to reduce economic growth
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Temporary income and permanent income and health
Temporary decrease income ppl have time to lose weight, but permanent income increase ppl have better health
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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
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In a recession, what happens to tax revenues and govt expenditures?
decrease/increase
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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.
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A decrease in the federal govt's budget surplus can be the result of
- decrease in taxes
- increase in govt purchases
- recession
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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
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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
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The Phillip curve exhibits
the relationship bet the unemployment and the inflation rates
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If price level increases over time then the average wage should increase by the same amount
true
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The unemployment rate for the long-run phillips curve is the
natural rate of unemployment
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If workers expect a higher inflation rate, the short run Phillips curve shifts
up
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What should firms, consumers and the govt take into account when making decisions?
inflation
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If the public starts seeing a higher inflation rate, the Phillips curve will shift to the
right
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What is the Volcker disinflation?
a reduction in the inflation rate bet 1979-1989
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Independent central banks are more effective at fighting
inflation
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Price Stickiness
wages and prices declined very slowly during the disinflation process
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Nominal interest rates are equal to
real interest rate plus expected inflation
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The current account
net exports, net investment income, and net transfers
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The financial account
net capital flows
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Balance of payment is equal to
the current account plus the financial account
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the diff bet net exports and current account is
net exports is a subcategory of the current account
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The balance of payments must always equal
0
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the surplus in the financial account means that
a country is selling more financial assets than it buys
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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
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The US trade deficit is almost always larger than the current account deficit because
the US has a surplus in the services account
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An increase in US interest rates, the dollar has relative to the euro?
appreciated
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An appreciation of the dollar is likely to lead to a current account deficit because
imports decrease and exports decrease
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Income rises in Japan and speculations of the dollar will be higher, which causes the demand to
increase
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When a country's currency appreciates, it is good for who and bad for who?
the consumers and bad for the country's businesses
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When a currency appreciates it does what to the price of imports and exports?
decreases/increases
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sagging dollar
The Japanese yen has appreciated relative to the US dollar
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constant currencies
the value of the currencies without exchange rate changes
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If global sales declined in dollar terms but rose in constant currencies, what happened to the value of the dollar?
depreciated
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the dollar advanced against most currencies means
the dollar is worth more in purchasing power than other currencies
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If there are no transfers or net investments, than net exports equals
net foreign investments
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saving and investment equation in an open economy
S=I+NFI
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If national saving declines and national investment does not change, then net foreign investment has
decreased
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Net foreign investment was negative
investment was larger than savings
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National saving
domestic investment plus net foreign investment
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budget surpluses do what to public savings and low interest rates do what to foreign investment?
increase/reduce
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twin deficit
a govt budget deficit may lead to a current account deficit
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increased domestic investment will lead to
capital inflow
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low domestic saving causes the current account to have a
deficit
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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
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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
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policy channel?
a way which monetary or fiscal policy affects the domestic economy
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higher interest rates cause GDP to decrease more in a open economy than a closed economy
true
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under the gold standard, exchange rates were determined by
the relative amounts of gold in each country's currency
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under bretton woods, they exchange rates were determined by
an agreement to fix the value of gold and all other currencies
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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
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the 4 determinants of exchange rates in the long run are
relative price levels, relative productivity growth, tastes, and trade barriers
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country that does not use the euro?
Denmark
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When one currency is pegged against another its value
is fixed in terms of that currency
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Why are foreign investors more likely to invest in US govt bonds than in US corporate bonds or stocks?
The are less risky
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Why has globalization increased growth in the world economy?
savings around the world can be channeled into the most productive investments
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undervalued currency
if the actual rate is larger than the implied rate
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implied exchange rate
local currency price/dollar price of big mac
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Countries that use the euro will not be able to
set their own independent monetary policies
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Why does the govt buy its own currency?
Increase the value
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A weaker dollar could mean higher inflation in the US because
prices of imported goods are likely to be higher
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How would a govt manipulate the currency to get an "unfair" trade advantage
the govt would undervalue the currency
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devaluation and revaluation
reduction and increase in a fixed exchange rate
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capital controls
limitations on the flow of foreign exchange and financial investment bet countries
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