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