Modules #30-36
Contractionary Policy
- decrease of money supply - causes increase in interest rate - decrease in planned investment spending - decrease in equilibrium GDP
Expansionary Policy involves
- increase of money - causes decrease in interest rate - increase in planned investment spending - increase in equilibrium GDP
Phillips curve slopes
Short Run: downward Long Run: vertical
Monetary Policy
The Fed affects interest rates by open market operations that shift the money supply curve
Trade-Off (Phillips Curve)
an economy experiences an increase in unemployment rate the the same time that inflation rate declines
Fiscal Policy
an expansionary fiscal policy would shift AD to the right and increase the size of the government budget deficit
Negative supply shock causes...
an increase in its aggregate price level and a decrease in its aggregate level of real GDP
Classical Macroeconomics
based largely on the foundation of flexible wages and prices points out that increases in money supply lead to equal proportional rises in the price level
If the Fed wants to decrease interest rates, it can....
buy treasury bills to increase the money supply
Stagflation
combination of unemployment and inflation
Monetarism
constant growth of the money supply is better than discretionary policies
Debt Deflation
deepens during an economic slump because borrowers have to lower spending to pay back burdensome debts mortgage holders lose but banks awaiting mortgage payments benefit
Public Debt
government debt held by individuals and institutions outside the government
Monetary policy in the short run
increases in aggregate demand from a position of full employment lead to higher prices and higher output
Expansionary Monetary Policy
increases the money supply, decreases interest rates, and increases consumption and investment
If the Fed wants to raise interest rate it can...
it can sell bonds, which reduces the money supply
Decrease in money supply
leads to a decrease in equilibrium real GDP and an increase in equilibrium price level
Increase in money supply
leads to an increase in equilibrium real GDP and an increase in equilibrium price level
In the long run, changes in money supply affects
price level but not aggregate output
Supply side economics (Reaganomics)
tax cuts increase incentives to work and save and cause increases in potential output
If the economy is suffering from a recessionary gap...
the Fed should conduct expansionary monetary policy by increasing money supply
If the Fed sells treasury bonds in an open market operation...
the money supply curve shifts left, interest rate increases, and the quantity of money decreases
If the Fed buys Treasury bonds in an open market operation....
the money supply curve shifts right, interest rate decreases, and quantity of money increases
When the output gap is positive
the unemployment rate is below the natural rate
Budget Surplus
total revenues are greater than its total expenditures
Budget Deficit
total revenues are less than total expenditures