Macroeconomics Unit Five: Stabilization Policies and Economic Growth

effect of supply shocks on SRPC

-A negative supply shock shifts SRPC up. -(SRPC shifts up by the amount of the increase in expected inflation.) -A positive supply shock shifts SRPC down.

Factors that can cause the demand curve for loanable funds to shift

-Changes in perceived business opportunities -Changes in the government's borrowing

Factors that can cause the supply of loanable funds to shift

-Changes in private savings behavior -Changes in capital inflows

Monetarism

-GDP will grow steadily if the money supply grows steadily. -eventually rejected by many macroeconomists.

Keynesian economics

-Short-run effects of shifts in aggregate demand on aggregate output. -Keynes argued that other factors than money are mainly responsible for business cycles.

Factors that cause major changes in interest rates

-changes in government policy -technological innovations that create new investment opportunities -expectations about future inflation.

New classical macroeconomics

-goes back to classical; shifts in the aggregate demand curve affect only the price level, not real GDP.

discretionary expansionary fiscal policies

-increased government purchases of goods and services, higher government transfers, or lower taxes -reduce budget balance

velocity of money

-ratio of nominal GDP to the money supply -M × V = P × Y

contractionary fiscal policies

-smaller government purchases of goods and services -smaller government transfers -higher taxes -increase the budget balance for that year, making a budget surplus bigger or a budget deficit smaller.

An open-market purchase . . .

. . . drives the interest rate down.

An open-market sale . . .

. . . drives the interest rate up.

An increase in the money supply . . .

. . . leads to a fall in the interest rate

Savings by government

= value of tax revenues - government purchases of goods and services - value of government transfers

The Interest Rate in the Long Run

In the long run, changes in the money supply don't affect the interest rate.

Rule of 70

Number of years for variable to double = 70/Annual growth rate of variable

Fisher effect

an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged.

cyclically adjusted budget balance

estimate of the budget balance if the economy were at potential output.

Crowding out

government deficit spending drives up the real interest rate and leads to reduced investment spending and consumption.

default

government not paying debt

loanable funds market

hypothetical market that examines the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders.

Rational expectations

individuals and firms make decisions optimally, using all available information.

expansionary fiscal policies

make a budget surplus smaller or a budget deficit bigger.

Classical macroeconomics

monetary policy affected only the aggregate price level, not aggregate output.

Expansionary monetary policy

monetary policy that increases aggregate demand.

Contractionary monetary policy

monetary policy that reduces aggregate demand.

short-run Phillips curve

negative short-run relationship between the unemployment rate and the inflation rate.

real interest rate

price, calculated as a percentage of the amount borrowed, charged by the lender to a borrower for the use of their savings for one year. =nominal interest rate - inflation rate

real GDP per capita

real GDP divided by population size

Implicit liabilities

spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics

budget balance

the difference between the government's tax revenue and its spending both on goods and services and on government transfers.

rate of return

the profit earned on the project expressed as a percentage of its cost. = [(revenue - cost of project) / cost of project] x 100

macroeconomic policy activism

the use of monetary and fiscal policy to smooth out the business cycle.

nonaccelerating inflation rate of unemployment (NAIRU)

unemployment rate at which inflation does not change over time.