Econ Study
The critical elements of nondiscretionary fiscal policy are
A progressive income tax and a welfare state
CPI overstates inflation
Because it lags behind, market basket changes every 2 years and doesn't take into account substitution
Inflation is calculated with CPI by
CPI Final-CPI Initial/CPI Initial*100%
M1
Cash Coin and Checking Accts
Fiscal Policy
Congress and the President
contractionary fiscal policy
Fiscal policy to slow the growth of the economy
Real GDP
GDP adjusted for inflation, doesn't account for population or changes in population, not per capita
Monetary Policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
expansionary fiscal policy
Increase in govt purchases or decrease in taxes: aimed to grow economy
Cost push inflation
Inflation caused by decrease in aggregate supply
determinants of aggregate supply
Input prices, productivity, and government regulation
If the federal reserve wished to engage in contractionary monetary policy
It could raise the federal funds rate target
One reason why Real GDP is not synonymous with social welfare is because
It ignores the value of leisure
As the baby boom starts to retire, you would expect to see the
Labor for participation rate steadily fall
What causes cost push inflation
Less productivity, 35 hr work week
M2
M1 + Savings accounts + Small CDs
Changes in the reserve ratio
Money that the fed has for banks that are maintained at the fed
Non-Discretionary Fiscal Policy
ND is something already in place
Unemployment includes
People who are looking for a job but don't have one
Federal reserve
Put into place to manage money: stop booms from being to high and busts being too low
Monetary transmission
The process by which the use of a monetary policy tool impacts the economy
discretionary fiscal policy
Discretionary is something put into place to fix something
Properties of GDP
Dollar Value of what's produced Includes: Good and services sold, consumption, investment, government spending, exports, imports Excludes: Foreign sales, intermediate expenses
open market operations
Fed goes and buys/sells government securities or bonds
Weakening of the dollar will shift AD
To the right
Aggregate supply shock
any event that causes the aggregate supply curve to shift inward or outward
Shocks
any unanticipated economic event
business cycle
boom and bust
What causes demand-pull inflation?
cut in taxes
the form of risk to the lender associated with a borrower not paying their debt is called
default risk
In the market for money, the behavior of borrowers is represented by the
demand curve
Encouraged worker effect
good news induces people to start looking for work, causing the unemployment rate to rise (until they succeed in finding work)
Interest rate effect
higher prices lead to inflation, which leads to less borrowing and a lowering of RGDP
A higher interest rate
increases the motivation to delay consumption and therefore save
Demand pull inflation
inflation caused by increase in AD
The property of money that allows us to avoid finding a trading partner for all of our goods is called
the medium of exchange
The reason that only final sales are counted in GDP is
to avoid double counting goods that are sold so as to be resold
Increase in taxes will shift aggregate demand
to the left
Decrease in demand will shift aggregate demand
to the right
Frictional Unemployment
unemployment that occurs when people take time to find a job
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves
Quantitative Easing
when the Fed buys longer-term government bonds or other securities
Inflation is calculated by
(Market Basket Final - Market Basket Initial)/Market Basket Initial* 100%
GDP can be calculated three ways
1. Add up the total value of all final goods and services produced 2. Add up all spending on domestically produced final goods and services. 3. Add up the total factor income earned by households from firms in the economy
Recession is defined by declining real GDP 5$-5 lasts over
2 consecutive calendar quarters
If the inflation rate is 2% and the real interest rate is 1%, the the nominal interest rate is
3% (add real interest and inflation)
discretionary fiscal policy issues
Recognition lag- time it takes to get to congress Administrative lag- time it takes to get approved Operational lag- time it takes to get money to people
Real balances effect
Since higher prices reduce real spending power, prices and output are negatively correlated
Liquidity Trap
Situation where interest rates are at 0 but there still isn't borrowing
determinants of aggregate demand
Taxes, Interest rates, Consumer and business confidence, strength of the dollar, govt spending
discouraged worker effect
The decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.
foreign purchases effect
When domestic costs more than imported, the country will export less to foreign buyers and import more
Aggregate demand shock
a rapid and unexpected shift in the AD curve (spending)
How does GDP deal with a Ford produced in Mexico?
it is not counted at all