ECO 202 Final (study this + other 2)
in the AE model, if the marginal propensity to consume is 0.50, an increase of $100 billion in investment spending will increase equilibrium real GDP by...
$200 billion
country w/ unemployment rate 2x ours
Euro Area
in the AE model, if the marginal propensity to consume is 0.50, an increase of $100 billion in investment spending will shift the AE line upward by...
$100 billion
why is MD slope negative?
an increase in int rates on short term financial assets increases the opportunity cost of holding money, decreasing the quantity of money demanded
the demand for US dollars is a derived demand for...
US foods, services and assets NOT the same as our domestic demand for money
does an appreciation of the dollar help US consumers?
Yes, goods are cheaper
does an appreciation of the dollar hurt US exporters?
Yes, they get same price but sell less
tax wedge
difference between pre tax and post tax return ex: $20 wage with 25% marginal tax rate = after tax wage of $15
what happens to the cost of Mexican goods in US if the price in the Mexico = 1500 pesos and the value of the dollar appreciates from 10 pesos to 15 pesos per dollar?
$150--> $100 $1=10p $1=15p
appropriate MONETARY policy if there is a short run equilibrium ABOVE potential GDP
increase interest rates = shifts D to left
most households are taxed on their returns from saving at the individual income rates. reducing marginal income tax rates, thereby ____ return to saving
increases
recession ____ the budget deficit or decreases budge surplus
increases
what shifts the MD curve to the right?
increase in real GDP and increase in price level
what happens to the cost of US goods in Mexico if the price in the US = $100 and the value of the dollar appreciates from 10 pesos to 15 pesos per dollar?
1,000 pesos --> 1,500 pesos $1=10p $1=15p
4 goals of monetary policy
1. price stability (low and stable inflation) target: 2% 2. high employment (natural rate) 3. economic growth 4. stability of financial markets and institutions (1&2= dual mandate)
tax payers spend > ____ each year filling out tax forms, or 45 hours per tax return
6.4 billion hours
country w/ highest inflation
Brazil
country w/ recession
Brazil
country w/ lowest inflation
China
country w/ highest real GDP growth rate
India
do US exporters receive a higher price when the dollar appreciates?
No, the receive the same price of $100
if the tax code were greatly simplified, the economic resources currently used by the tax prep industry would ...
be available to produce other goods/services
quantitative easing
central bank policy that stimulates the economy by buying long term securities (fed normally buys short term)
fiscal policy
changes in federal taxes, transfer payments, and purchases intended to achieve macroeconomic policy objectives NOT changes in int rates and money supply (mon) President and congress determine fiscal policy
why is MS slope vertical?
changes in the money supply change market int rates, but changes in market int rates don't change the money supply
which of the following would be the best measure of the cost of living?
consumer price index
inflation gap
current inflation rate -target inflation rate
appropriate FISCAL policy if there is a short run equilibrium ABOVE potential GDP
decrease gov spending and/or increase taxes = shifts D to left
appropriate MONETARY policy if there is a short run equilibrium BELOW potential GDP
decrease interest rates = shifts D to right
by decreasing the interest rate on bank reserves deposited at the Fed, the fed can ______ the level of excess reserves banks are willing to hold, thereby _____ bank lending
decrease; increasing
an appreciation of US dollar...
decreases US exports increases US imports so US net exports decrease shifts AD curve to the left and AE line left *graph
the foreign exchange rate is determined by...
demand and supply of dollars
the adjustment of the economy to potential real GDP in the long run from a level of real GDP below potential real GDP occurs as nominal wages ___, shifting the short run aggregate supply curve to the ___
fall; right
monetary policy in AS-AD model: EXPANSIONARY
fed buys gov securities increases bank reserves increases money supply decreases int rate increases AD increases real GDP decreases unemployment increases price level
monetary policy realistic expectations
fed can't eliminate recessions, but they can keep them shorter and milder change in int rates (MP) is typically spread out over several years
what shifts the MS curve to the right?
fed monetary policy: increase money supply- open market purchase, reduce required reserved ratio, decrease int rates on bank reserve deposits at the fed
monetary policy in AS-AD model: CONTRACTIONARY
fed sells gov securities decreases bank reserves decreases money supply increases int rate decreases AD decreases real GDP increases unemployment decreases price level
supply side economics
fiscal policy actions intended to have long run effects by expanding the productive capacity of the economy and increasing the rate of economic growth attempt to increase aggregate supply by changing taxes to increase the incentives to work, save, invest, and start a business
dual mandate
goal of price stability and high employment
budget surplus
gov spending < tax revenue
budget deficit
gov spending > tax revenue
automatic stabilizers
gov spending and taxes that automatically increase or decrease along with the business cycle ex: during recession, gov spending on UE payment insurance automatically increases as workers lose their jobs and gov collects less in taxes as income and profits fall decreases severity of business cycle *graphs
suppose you borrow $1,000 at an interest rate of 8 percent. If the expected real interest rate is 3 percent, then the rate of inflation over the upcoming year that would be most beneficial to you as a borrower would be a are of inflation
greater than 5 percent
limitations of fiscal policy
impact lag for gov purchases can be long bc even after the fed gov authorizes new expenditures it takes time to plan, ask for bids, and begin new projects
bc innovations often embody in new investment goods, cutting the corporate income tax can potentially ___ the pace of technological change
increase
appropriate FISCAL policy if there is a short run equilibrium BELOW potential GDP
increase gov spending and/or decrease taxes = shifts D to right
factors that shift the demand for curve of dollars to the right
increase in US int rates decrease in foreign int rates
war=
increase in gov spending = D shifts right
fed fights inflation
increase in interest rates = less spending = D shifts left
an increase in the nominal exchange rate ___ the cost of US goods, services and assets to foreign households and firms, ___ their quantity demanded of US goods, services and assets, and therefore ___ the quantity demanded of dollars (why the DC for dollars slopes downward)
increases decreasing decreases
cutting the marginal corporate income tax rate would encourage investment spending by ___ the return corporations receive from new investments in equipment, factories and office buildings
increasing
reducing marginal taxes in individual income reduces the tax wedge workers face, thereby ___ the quantity of labor supplied
increasing
federal funds rate
int rate names charge each other for overnight loans (of reserves) short term nominal int rate fed sets TARGET but not actual rate
taylor rule
links fed's target for fed funds rate to economic variables FF target rate=current inflation rate+equilibrium real FF rate+1/2 inflation gap+1/2 output gap
changes in int rate cause a ___ the MD curve
movement along, not a shift
static model assumes
no continuing inflation, so no ongoing increase in the expected price level, which decreases SRAS no continuing long run economic growth, so LRAS does not regularly shift outward
flat tax
no deductions
real GDP will increase...
only if the quantity of final goods and services produced rises
demand for money (MD)
people demand (hold) money (medium of exchange) to facilitate making exchanges *graph
full employment is NOT considered to be zero unemployment because...
people do not find jobs instantaneously
output gap
percentage difference between real GDP and potential GDP
dynamic model assumes
potential GDP increases each year, shifting the LRAS to the right unless there is some big negative shock to potential GDP AD shifts to the right most years, unless there is something that drops AD SRAS does not shift to the right as far as LRAS, because continuing inflation raises the expected future price level
effect of an appreciation of the dollar on US EXPORTS
price of US goods in Mexico = Pus x EX
effect of an appreciation of the dollar on US IMPORTS
price of foreign goods in US = Pf / EX
supply of money (MS)
quantity of money supplied at each and every interest rate *graph
how does a positive inflation gap effect the FF target rate?
raise int rates
how does a positive output gap effect the FF target rate?
raise int rates
laffer curve
relationships between tax rates and tax revenue tax rev when rate = 0% is 0 tax rev when rate =100% is 0
demand and supply of money determine
short term nominal interest rate
fed gov debt (national/public)
sum of past deficits - budget surpluses total value of US treasury bonds outstanding
monetary policy
the actions the federal reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives Fed Reserve determine monetary policy by changing interest rates
the aggregate expenditure model seeks to explain...
the business cycle
which of the following is a true statement about the multiplier?
the formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate
which of the following is a true statement about the multiplier? (2)
the multiplier rises as at the MPC rises
many small businesses are sole proprietorships whose profits are taxed at the individual income rates. cutting individual income tax rates raises the return to entrepreneurship , encouraging...
the opening of new businesses
how monetary policy affects AD.. decrease in int rates shifts AD...
to the right
nominal exchange rate (EX)
value of one country's currency in terms of another country's currency
fed funds rate- how it works
w/ open market operations, the Fed changes the quantity of bank reserves which changes the fed funds rate