Econ Exam 3 1100
A political problem w/ discretionary fiscal policy is the
expansionary bias
When the federal reserve wishes to, in the short run, increase real GDP it will increase the money supply by buying bonds
fiscal policy is controlled by Congress and the president
Consumer Price Index (CPI)
goods consumers purchase or "basket"
discretionary fiscal policy
gov spending and tax changes enacted at time of problem to alter economy
Fiscal policy is purposeful movement in ______ designated to direct an economy
gov spending and taxes
Intrest Rate Effect
higher prices lead to inflation, leading to less borrowing and a lowering of RGDP (real gdp)
The point of open market opperations:
increase/decrease the money supply and influence interest rates
Deflector
index of an averaging of prices of all goods included in GDP
the federal reserve has
indirect influence over macroeconomic variables such as unemployment and inflation through the use of intermediate targets.
If i=unemployment rate falls because number of people not working but searching for a job falls, economists would say,
its the discouraged worker effect
Problems with discretionary fiscal policy
lags, expansionary bias, political business cycle
Aggreate supply
level of real domestic output avaible at each possible price
an event that creates a "crisis in confidence" leads to,
lower aggregate prices
Why does CPI overestimate cost of livin?
makes no attempt to control substitution to cheaper goods
Genuine Progress Indicator (GPI)
measures production like environmental, social, and economic, like OECD (resources fro current and future well being)
The federal reserve governs U.S>
monetary policy
Say's Law (Long Run)
neoclassical economics supply creates it's own demand when goods are produced, people earn more income and have more to spend
The federal reserve long-standing tools includes
open market opperations
How to asses the prosperity of a country
per capital GDP = GDP/population
Changing REserve Requirement
percentage of deposits that banks must have at their regional federal bank to back up their deposits- only used for large adjustments excess funds are loaned out to earn additional revenue higher reserve requirement; the smaller amount of money to loan out
Inflation is measured using ________ in a price index
percentage of year-year increase
Structural unemployment
persistent- due to supply and demand/ technological change
Automatic Stabilizers
policies built into the system so expansionary or contractility stimulus can be given automatically -the welfare state and progressive income tax
political buisness cycle
politically motivated fiscal policy is used for short-term gain just prior to elections
Expansionary bias
politicians are more willing to use tax cuts & spending increases than tax increases & spending cuts
changing the discount rate
rate banks pay the federal government if they need to borrow money higher discount rate: banks will keep extra on hand to meet the reserve requirement less they loan out: lower investment and consumption expenditures
With 125 million people working, 8 million out of work, and looking for work, and 147 million not working or looking for work unemployment rate would be? Unemployment would be illustrated by
rate: 6.0% (8/(125+8)x 100 illustrated by: part of the 125 mil holding part-time jobs when they were qualified for full times jobs
Lags in Fiscal Policy
recognition: measure state of economy adinistrative: make a decision between congress and president opperational: time for full impact of gov program/tax change to effect economy
cyclical unemployment
results from position in business cycle
If the federal reserve wished to increase interest rates using open market operations it would
sell U.S government securities
Gov influence on demand
taxes go up- AD goes down gov spending goes up- AD goes down Interest Rates (consumption goes up- AD goes up)
Aggreate Demand
the amount of goods and services in the economy that will be purchased at all possible price levels tends to be a steep curve, downward sloping
Aggravate supply/demand diagram models
the economy as a whole
to an economists a "market basket" is made up of
the goods average people buy and the quantities in which they buy them
Misery Index
the measure of unemployment and inflation every month (Aurthor Oken)
Inflation rate
the percentage increase in the price level from one year to the next [ (CPI Yr. 2 - CPI Yr. 1)/ (CPI Yr. 1)] x 100
labor force participation rate
the percentage of the population aged 16 or older that is in the labor force
If a market basket was defined in 2014 and cost $10,000 to purchase items in that basket, while in 2015 it cost $11,000 for the same goods, the base year is? The price index for 2015 is?
Base year: 2014 Price Index for 2015: (11,000/10,000)x100= 110
Keynes' Law (Short Run)
Demand creates it's own supply When people don't want goods, there is no need for supply
Purchasing Power Parity (PPP)
Exchange rate of one currency to another that compares the cost of living in different countries through comparing a typical basket of goods
Newer Monetary Policy (2008)
Fed pushed long-term gov mortgage-backed securities to help stimulate the economy- significant deviation since these are considered "toxic assets" and were purchased
Open market opperations
Federal reservations buy bonds to get cash in the economy and sell bonds to get it out making small adjustments more money in the economy puts downward pressure on interest rates
contractionary fiscal policy
Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.
Shifting the Aggregate Demand Curve
GDP = C + I + G + (x-m)
Wealth Effect
Higher prices reduce real spending power, prices and output are negitively related
The federal reserve espaneded their traditional tool set in the 2007-2009 ressecion to include
the purchase of mortgage backed securities
core inflation
the underlying increases in the price level after volatile food and energy prices are removed
What is NOT a reason the CPI overestimates the cost of living? there are too frequent updates of the market basket
there are too frequent updates of the market basket
What is described as an administrative lag?
time required to agree upon a policy remedy for a recession
GDP (Gross Domestic Product)
total market value of all final goods and services produced in economy during a given year. Focuses on production not quality of life
Forgin Price Effect
When domestic prices are high, we export less to forgin buyers and import more from forgin producers higher prices lead to less domestic output
Use AS/AD model to determine what will lead to higher prices
an increase in gov spending
What will increase macroeconomic equilibrium prices?
an increase in gov spending
What will increase macroeconomic equilibrium real gross domestic product?
an increase in gov spending
Only final sales are counted in GPD because
avoid double counting goods
frictional unemployment
between jobs/ looking for a job
discretionary fiscal policy works by having
both progressive income tax rates take a portion of increased income and welfare programs reduce spending on people when they have increased incomes thereby dampening periods of economic growth
Real GDP
calculated using prices from a selected "base" year (adjusted for inflation) = nominal GDP/price index/100
Nominal GDP
calculated using the prices from the current year, increases when output/ prices go up real higher on left side, nominal high on right
fiscal policy
changes in government spending/tax policy with intention of pushing economy out/pull economy back- what congress conducts
If a person is laid off from a job and told they will be brought back when economy picks up and demand rises, economists call this
cyclically unemployed
What makes unemployment rate fall?
decrease in number of people looking for work and increase in number of people with jobs
What makes unemployment rates fall?
decrease in people looking for work and an increase in the 1number of people with jobs
The interest rate effect, real balance effect, and foreign purchases effect suggest that the aggregate demand curve is,
downward sloping
Labor force
employed + unemployed
A reason real gross GDP is not synonymous wit social welfare is,
environmental quality is ignored
expansionary fiscal policy
An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
There are 2 goods, (A&B) A person buys 4 of A and 3 of B in a year. Good A =$5 good B =$10, what is the price market?
$50
The reserve ratio is
% of every dollar deposited in a checking account that a bank must maintain in reserves
non-discretionary fiscal policy
(automatic stabilizers) set of policies that are built into the system to stabilize the economy
To contract economy- Monetary policy
- sell bonds - increase discount rate - raise reserve requirements
To expand economy- Monetary policy
-buy bonds - decrease discount rate - lower reserve requirement
A decrease in gov spending will cause
AD to increase (move to left)
A decrease in taxes will cause
AD to increase (move to right)
An increase in productivity will cause
AS to decrease (move down and to left)
An increase in output prices will cause
AS to decrease (move up and to left)
Natural Rate of Unemployment (NRU)
Actual unemployment rate- cyclical: changes over time; labor force change, labor market institutional change, gov policies changes, productivity changes
How does GDP account for something that was produced for sale in one year and sold in the next year?
Counted as an addition to inventory (in business is and investment) in the year it was produced and markup is counted in year it was sold
Shifting the Aggregate Supply Curve
Increase Input prices: the larger amount of supply at each price level Increase Productivity: firms can produce more than they could before at the same/cheap price
Gov influence on supply
Input and regulate costs, increase incentive to work, tax raises
Business Cycle
Peak, recession/contraction, trough, recovery/expansion
Monetary Policy
Run by the federal government, has the power to regulate the amount of money in the economy
Producer Price Index (PPI)
a measure of the cost of a basket of goods and services bought by firms/buisnesses
An example of discretionary fiscal policy would be
a tax cut adopted to stimulate consumption
Real GDP is GDP
adjusted for inflation
Short-run contractility fiscal policy results in
aggravate demand moving to left
unemployment rate
unemployed workers/labor force x 100
Find Index
year 2 - base year (year 1) x 100