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