Macro ch 15,16,17
Natural rate of employment:
The unemployment rate that exists when the economy is at potential GDP
If the price level decreases,
the money demand curve shifts to the left.
Which can be changed more quickly: monetary policy or fiscal policy?
-Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.
Monetary policy is defined as:
-The actions the Federal Reserve takes to manage the money supply and interest rates.
Who is responsible for fiscal policy?
-The federal government controls fiscal policy
What are the Fed's main monetary policy targets?
-The money supply and interest rates
monetary policy long run:
-Unemployment rate is independent of the inflation rate (no trade-off)
If actual inflation is higher than expected inflation, the....
-actual real wage is less than the expected real wage: unemployment falls.
Natural rate cannot:
-be permanently lower than the unemployment rate
What is fiscal policy?
-can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
In the long run, increases in government purchases result in..
-complete crowding out.
discretionary fiscal policy:
-government takes actions to change spending or taxes
Monetary policy goals of the Federal Reserve:
-high employment . -stability of financial markets -price stability
Workers, firms, banks, and investors in financial markets care about the future rate of inflation because?
-if actual inflation turns out to be different from the expected inflation, real wages, profits, and interest will be different from their expected values.
contractionary fiscal policy?
-includes decreasing government spending and increasing taxes to decrease aggregate demand. (Raises IR decreases AD) -Fed uses to achieve price stability
expansionary fiscal policy?
-includes increasing government spending and decreasing taxes to increase aggregate demand. (lowers IR increases consumption and AD) -Fed uses to establish high employement
If the government increases expenditure without raising taxes, this will?
-increase the budget deficit and require the government to borrow additional funds. -cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector.
crowding out?
-is a decline in private expenditures as a result of increases in government purchases.
A countercyclical policy is one that..
-is used to attempt to stabilize the econom
-The Fed uses policy targets of interest rate and/or money supply because
-it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.
If workers and firms have rational expectations and wages and prices adjust quickly, then if the Fed announces a credible expansionary monetary policy...
-the inflation rate will increase, but the unemployment rate will be unchanged.
The federal funds rate is?
-the interest rate that banks charge each other for overnight loans -very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
If real GDP increases,
-the money demand curve shifts to the right.
When Congress established the Federal Reserve in 1913, its main responsibility was?
-to make discount loans to banks suffering from large withdrawals by depositors.
natural rate of unemployment:
-unemployment rate that exists when the economy produces potential GDP
If the Fed believes the inflation rate is about to increase, it should...
-use a contractionary monetary policy to increase the interest rate and shift AD to the left
If the Fed believes the economy is about to fall into recession, it should..
-use an expansionary monetary policy to lower the interest rate and shift AD to the right.
If the Fed wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation, then it should....
-use expansionary monetary policy
1.)The short-run Phillips curve exhibits : 2)The long-run Phillips curve shows:
1.)a trade-off between inflation and unemployment 2)no trade-off between inflation and unemployment
If workers ignore inflation in forming their expectations of the real wage rate, what is the effect of an expansionary monetary policy?
-A move up along the short-run Phillips curve.
What is a banking panic?
-A situation in which many banks experience runs at the same time.
discount rate?
- is the rate at which the Fed lends to banks.
When the Fed conducts an open market purchase....
- the Fed buys securities from banks and the money supply increases .
Phillips curve:
-A curve showing the short-run relationship between the unemployment rate and the inflation rate.
monetary policy short run:
-Lower unemployment rates can result in higher inflation rates; vice versa (there can be a trade-off between unemployment and inflation)