Econ Exam 3 1100

A political problem w/ discretionary fiscal policy is the

expansionary bias

When the federal reserve wishes to, in the short run, increase real GDP it will increase the money supply by buying bonds

fiscal policy is controlled by Congress and the president

Consumer Price Index (CPI)

goods consumers purchase or "basket"

discretionary fiscal policy

gov spending and tax changes enacted at time of problem to alter economy

Fiscal policy is purposeful movement in ______ designated to direct an economy

gov spending and taxes

Intrest Rate Effect

higher prices lead to inflation, leading to less borrowing and a lowering of RGDP (real gdp)

The point of open market opperations:

increase/decrease the money supply and influence interest rates

Deflector

index of an averaging of prices of all goods included in GDP

the federal reserve has

indirect influence over macroeconomic variables such as unemployment and inflation through the use of intermediate targets.

If i=unemployment rate falls because number of people not working but searching for a job falls, economists would say,

its the discouraged worker effect

Problems with discretionary fiscal policy

lags, expansionary bias, political business cycle

Aggreate supply

level of real domestic output avaible at each possible price

an event that creates a "crisis in confidence" leads to,

lower aggregate prices

Why does CPI overestimate cost of livin?

makes no attempt to control substitution to cheaper goods

Genuine Progress Indicator (GPI)

measures production like environmental, social, and economic, like OECD (resources fro current and future well being)

The federal reserve governs U.S>

monetary policy

Say's Law (Long Run)

neoclassical economics supply creates it's own demand when goods are produced, people earn more income and have more to spend

The federal reserve long-standing tools includes

open market opperations

How to asses the prosperity of a country

per capital GDP = GDP/population

Changing REserve Requirement

percentage of deposits that banks must have at their regional federal bank to back up their deposits- only used for large adjustments excess funds are loaned out to earn additional revenue higher reserve requirement; the smaller amount of money to loan out

Inflation is measured using ________ in a price index

percentage of year-year increase

Structural unemployment

persistent- due to supply and demand/ technological change

Automatic Stabilizers

policies built into the system so expansionary or contractility stimulus can be given automatically -the welfare state and progressive income tax

political buisness cycle

politically motivated fiscal policy is used for short-term gain just prior to elections

Expansionary bias

politicians are more willing to use tax cuts & spending increases than tax increases & spending cuts

changing the discount rate

rate banks pay the federal government if they need to borrow money higher discount rate: banks will keep extra on hand to meet the reserve requirement less they loan out: lower investment and consumption expenditures

With 125 million people working, 8 million out of work, and looking for work, and 147 million not working or looking for work unemployment rate would be? Unemployment would be illustrated by

rate: 6.0% (8/(125+8)x 100 illustrated by: part of the 125 mil holding part-time jobs when they were qualified for full times jobs

Lags in Fiscal Policy

recognition: measure state of economy adinistrative: make a decision between congress and president opperational: time for full impact of gov program/tax change to effect economy

cyclical unemployment

results from position in business cycle

If the federal reserve wished to increase interest rates using open market operations it would

sell U.S government securities

Gov influence on demand

taxes go up- AD goes down gov spending goes up- AD goes down Interest Rates (consumption goes up- AD goes up)

Aggreate Demand

the amount of goods and services in the economy that will be purchased at all possible price levels tends to be a steep curve, downward sloping

Aggravate supply/demand diagram models

the economy as a whole

to an economists a "market basket" is made up of

the goods average people buy and the quantities in which they buy them

Misery Index

the measure of unemployment and inflation every month (Aurthor Oken)

Inflation rate

the percentage increase in the price level from one year to the next [ (CPI Yr. 2 - CPI Yr. 1)/ (CPI Yr. 1)] x 100

labor force participation rate

the percentage of the population aged 16 or older that is in the labor force

If a market basket was defined in 2014 and cost $10,000 to purchase items in that basket, while in 2015 it cost $11,000 for the same goods, the base year is? The price index for 2015 is?

Base year: 2014 Price Index for 2015: (11,000/10,000)x100= 110

Keynes' Law (Short Run)

Demand creates it's own supply When people don't want goods, there is no need for supply

Purchasing Power Parity (PPP)

Exchange rate of one currency to another that compares the cost of living in different countries through comparing a typical basket of goods

Newer Monetary Policy (2008)

Fed pushed long-term gov mortgage-backed securities to help stimulate the economy- significant deviation since these are considered "toxic assets" and were purchased

Open market opperations

Federal reservations buy bonds to get cash in the economy and sell bonds to get it out making small adjustments more money in the economy puts downward pressure on interest rates

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

Shifting the Aggregate Demand Curve

GDP = C + I + G + (x-m)

Wealth Effect

Higher prices reduce real spending power, prices and output are negitively related

The federal reserve espaneded their traditional tool set in the 2007-2009 ressecion to include

the purchase of mortgage backed securities

core inflation

the underlying increases in the price level after volatile food and energy prices are removed

What is NOT a reason the CPI overestimates the cost of living? there are too frequent updates of the market basket

there are too frequent updates of the market basket

What is described as an administrative lag?

time required to agree upon a policy remedy for a recession

GDP (Gross Domestic Product)

total market value of all final goods and services produced in economy during a given year. Focuses on production not quality of life

Forgin Price Effect

When domestic prices are high, we export less to forgin buyers and import more from forgin producers higher prices lead to less domestic output

Use AS/AD model to determine what will lead to higher prices

an increase in gov spending

What will increase macroeconomic equilibrium prices?

an increase in gov spending

What will increase macroeconomic equilibrium real gross domestic product?

an increase in gov spending

Only final sales are counted in GPD because

avoid double counting goods

frictional unemployment

between jobs/ looking for a job

discretionary fiscal policy works by having

both progressive income tax rates take a portion of increased income and welfare programs reduce spending on people when they have increased incomes thereby dampening periods of economic growth

Real GDP

calculated using prices from a selected "base" year (adjusted for inflation) = nominal GDP/price index/100

Nominal GDP

calculated using the prices from the current year, increases when output/ prices go up real higher on left side, nominal high on right

fiscal policy

changes in government spending/tax policy with intention of pushing economy out/pull economy back- what congress conducts

If a person is laid off from a job and told they will be brought back when economy picks up and demand rises, economists call this

cyclically unemployed

What makes unemployment rate fall?

decrease in number of people looking for work and increase in number of people with jobs

What makes unemployment rates fall?

decrease in people looking for work and an increase in the 1number of people with jobs

The interest rate effect, real balance effect, and foreign purchases effect suggest that the aggregate demand curve is,

downward sloping

Labor force

employed + unemployed

A reason real gross GDP is not synonymous wit social welfare is,

environmental quality is ignored

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

There are 2 goods, (A&B) A person buys 4 of A and 3 of B in a year. Good A =$5 good B =$10, what is the price market?

$50

The reserve ratio is

% of every dollar deposited in a checking account that a bank must maintain in reserves

non-discretionary fiscal policy

(automatic stabilizers) set of policies that are built into the system to stabilize the economy

To contract economy- Monetary policy

- sell bonds - increase discount rate - raise reserve requirements

To expand economy- Monetary policy

-buy bonds - decrease discount rate - lower reserve requirement

A decrease in gov spending will cause

AD to increase (move to left)

A decrease in taxes will cause

AD to increase (move to right)

An increase in productivity will cause

AS to decrease (move down and to left)

An increase in output prices will cause

AS to decrease (move up and to left)

Natural Rate of Unemployment (NRU)

Actual unemployment rate- cyclical: changes over time; labor force change, labor market institutional change, gov policies changes, productivity changes

How does GDP account for something that was produced for sale in one year and sold in the next year?

Counted as an addition to inventory (in business is and investment) in the year it was produced and markup is counted in year it was sold

Shifting the Aggregate Supply Curve

Increase Input prices: the larger amount of supply at each price level Increase Productivity: firms can produce more than they could before at the same/cheap price

Gov influence on supply

Input and regulate costs, increase incentive to work, tax raises

Business Cycle

Peak, recession/contraction, trough, recovery/expansion

Monetary Policy

Run by the federal government, has the power to regulate the amount of money in the economy

Producer Price Index (PPI)

a measure of the cost of a basket of goods and services bought by firms/buisnesses

An example of discretionary fiscal policy would be

a tax cut adopted to stimulate consumption

Real GDP is GDP

adjusted for inflation

Short-run contractility fiscal policy results in

aggravate demand moving to left

unemployment rate

unemployed workers/labor force x 100

Find Index

year 2 - base year (year 1) x 100