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