Economics Test 3
What is the Feds dual mandate
Maintain full employment while also maintaining stable prices
Peak (business cycle)
Max level of GDP, economic activity and unemployment at a minimum
MP curve
Monetary Policy Identify what the interest rate is
Reasons 1 to not worry about the debt
Most is owed by Americans to Americans
Positive output gap
Not sustainable
What is measured on the horizontal axis on the Phillips curve diagram?
Output Gap
Where does the govt get most of its money?
Payroll taxes and income taxes
Stages of the business cycle
Peak Recession Trough Expansion
Supply shocks shift _______ curve
Phillips curve
If there is inflation of 4% and a firm wants to reduce real wages by 1%, it will need to
Raise nominal wages by 1%
reason 3 to worry about the debt
Risk of a crisis of confidence
what cost-push inflation does
Shifts the Phillips curve up and down Higher input costs (oil, wages), lower productivity, and foreign goods are more expensive
Business Cycle
Short term fluctuations in economic activity
How does the Fed govt spend most of its tax revenue?
Social security, Medicaid, Military spending
If a government is using fiscal policy, this means that it is using _____ and _____ to attempt to stabilize the economy. Group of answer choices
Spending; tax policies
How did tax revenue change for the state of Kansas (compared to surrounding states) after the tax cuts?
Tax revenues decreased
Characteristics of recessions
Tend to be short but sharp, expansion is gradual
Philips Curve
relationship between the change in the output gap and unexpected inflation
If the actual inflation rate is higher than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.
rise:down
Real interest rate
risk free rate + risk premium
Reason 1 to worry about the debt
slower economic growth
Tax expenditures are
special deductions, credits, or exemptions that lower your tax obligations
The neutral interest rate is the rate at which
the output gap is equal to zero
An economy's potential output level is
the output that is possible when all resources are fully employed.
Inflation Expectations
the rate at which average prices are anticipated to rise next year
what is social insurance to the research paper by Carranza, Donald and Kaur
the sharing of income with family members or friends.
Financial shifts ________ curve
MP curve
3 Causes of inflation
1. inflation expectations 2. demand-pull inflation 3. cost-push inflation
How much does education account for on tot govt spending
20%
How much does social insurance and military spending account for total Govt spending
80%
What is difference in difference estimation?
A quasi-experimental approach that compares the difference in outcomes over time between a treatment group and a comparison group.
when real interest rates fall _______ increases
C+I+G+NX(X)
Neg output gap
Corresponds with high unemployment
If the economy is in a recession, then the appropriate FISCAL policy that would reduce unemployment is to
Cut taxes or increase govt spending
Fed Model
Delivers a complete set of forecasts
Rule of thumb for the Feds
For interest rates (the long equations)
If an economy has a positive output gap of 2.75%, this means
GDP is 2.75% above potential GDP.
Expansion
GDP starts to increase Unemployment is falling
reason 5 to not worry about the debt
Govt has options that you dont
When considering changing tax rates for the wealthiest Americans, equity concerns suggest that tax rates for the wealthy should be ________; efficiency concerns suggest that tax rates for the wealth should be________.
Higher;Lower
Spending shocks shift ________ curve
IS curve
unemployment will rise when
Inflation falls below inflation expectations
IS Curve
Interest Sensitivity of output
what is Social insurance
The insurance provided by the Govt against bad outcomes like unemployment, illness, disability, or outliving your savings
If you start start with current inflation expectations you get :
The real interest rate Output gap Unexpected inflation Actual inflation
What is measured on the vertical axis on the Phillips curve diagram?
Unexpected Inflation
Spending shocks
What affects (shifts) C+I+G+NX (The IS curve)
Financial shocks
What affects (shifts) the MP curve risk free rate&risk premium
Trough
Where GDP is at its minimum and unemployment is highest worst part of the recession
Okuns Rule of Thumb
a 1% output gap increase makes unemployment go down .5% and a 1% decrease in the output gap makes unemployment rise by .5%
reason 4 to worry about debt
a debt crisis becomes more likely
If unemployment is above its sustainable level, then the economy is
operating below capacity, and inflation will likely fall
The federal govt gets most of its revenue from _______
payroll taxes
the business cycle is
persistent
Tax Expendatures
provisions of the tax code that can reduce how much a taxpayer owes
If an economy has an output gap of 0%, this means
actual GDP is at potential GDP.
Monetary policy is defined as the
adjustment of interest rates to influence economic conditions
Fiscal policy
changing of govt spending/changing taxes to effect the economy (effects the IS curve)
lower interest rates boost ________
consumption investment govt purchases net exports
Many macroeconomic variables are
correlated
To say that business cycles are persistent means that
current conditions typically continue in the near future.
Recession (business cycle)
declining GDP, unemployment increases, point from Peak to trough.
when the output gap becomes more positive ________ rises
demand pull inflation rises
Output Gap
difference between actual and potential output, measured as a % of potential output
Total inflation
expected inflation + demand-pull inflation + cost-push inflation
reason 2 to worry about the debt
future fiscal choices are constrained
reason 2 to not worry about the debt
future generations can help pay it
Reason 4 to not worry about the debt
govt never really needs to repay it
Demand-pull Inflation
inflation resulting from excess demand
Cost-push inflation is
inflation that results from an unexpected rise in product costs
Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 3%, then the Fed will want the new real interest rate to be
lower than the neutral interest rate
If the actual inflation rate is less than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.
lower:up
what does the study by Carranza, Donald and Kaur find out
this "social insurance tax" REDUCES the amount people work and earn
What is the Federal Reserve's mandate?
to ensure maximum employment while maintaining stable prices
who do tax expenditures mostly benefit and why
wealthy, bec of the progressive tax system (higher tax bracket you are the higher savings you get)
Which statement best represents the relationship between interest rates and aggregate expenditure?
when interest rates fall, aggregate expenditure increases
reason 3 to not worry about the debt
wouldn't take a big adjustment to repay it