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According to the text, in many respects, the single most power economic policymaker in the US is
The federal reserve
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What are monetary policy goals?
- Keep unemployment rates low
- prevent high rates of inflation
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The monetary policy tool that involves the buying and selling of government bonds is
Open-market operations
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Expansionary monetary policy
when the economy is in recession and unemployment is a problem. The goal of expansionary monetary policy is to reduce unemployment. Therefore the tools would be an increase in the money supply. To increase the money supply the federal government can: Buy government bonds(open market purchase) Lower the interest rate Lower the reserve ratio
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Contractionary monetary policy
when economy is in expansion and inflation is a problem. The goal of contractionary monetary policy is to reduce inflation. Therefore the tool would be the decrease in the money supply. To decrease the money supply the federal reserve can: Sell government bonds(an open market sell) Raise the interest rate Raise the reserve ratio
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If the economy experiences a recessionary gap. Expansionary monetary policy will ___ real GDP and ___ price level.
increase; increase
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When the Fed sells bonds in the open market, we can expect
Bon prices to fall and interest rates to rise.
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Change in the money supply brough about by an open market purchase will...
Lower interest rate, lower exchange rate, increase demand for investment and net exports
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High interest rates in the US would ___ the demand for US dollars in the foreign exchange market. In turn, this will lead to a(n) ___ in the exchange rate, and US net exports would ____
Increase; increase; fall
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If inflation is a threat, Fed will conduct monetary policy aimed at ___ the interest rate which will then shift AD to the ____.
Increasing; left
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Instruments of fiscal policy
rebate on payroll taxes, education tax credits, unemployment insurance benefits
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The government purchases compenet of aggregate demand includes
- All purchases by government agencies of goods and services produced by firms
- direct production by government agencies
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Public investment expenditure for highways, schools, and national defense is included in which component of GDP?
Government purchases
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Payments to households that do not require anything in exchange are called
Transfer payments
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Medicade, welfare payments, and temporary assistance to needy families are
Transfer payments
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Transfer payments typically
Fall during expansionary periods and rise during recessionary periods
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Government has a budget surplus if
its total revenues are greater than its total expenditures
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The sum of all past federal deficits minus any surpluses is called
National debt
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If the federal budget is initially balanced and government expenditures remain constant, then an increase in GDP will ___ tax revenues and create a budget ____
Increase; surplus
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How do you calculate national debt?
Debt minus surplus
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Personal income taxes and transfer payments
Act as automatic stabilizers
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A transfer payment that rises automatically during a recession is
unemployment compensation
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During an expansion, what occurs because of automatic stabilizers?
- Income tax revenues tend to rise
- The government's budget deficit tends to fall or its budget surplus tends to rise
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Changes in expenditures and taxes that occur through automatic stabilizers
Do not shift the AD curve
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Discretionary fiscal policy refers to
Deliberate government efforts to stabilize the economy through government spending and taxes
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What's the difference between fiscal and monetary policy?
- Fiscal policy is government action
- Monetary is the Fed action
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Contractionary fiscal policy includes
increasing taxes and decreasing government expenditures
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Expansionary fiscal policy shifts the AD curve
to the right and is used to close recessionary gap
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An inflationary gap can be closed with
using a policy action such as a reduction in government purchases
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implementation lag for discretionary fiscal policy
the time it takes to secure bureaucratic approval for policy actions
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An expanionary fiscal policy is likely to
increase borrowing by the Treasury through the sale of bonds
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Expansionary fiscal policy leads to
higher interest rates which increase the demand for a nation's currency, and causes its exchange rate to rise
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The term "crowding out" refers to the phenonmenon that occurs when increased government spending
leads to interest rates which reduces private investments
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Crowding out
When government finances its spending with taxes, and crowds out smaller businesses with less money
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Historical relationship between inflation and unemployment
Stagflation, recovery, philips cycle
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Understanding Philips Curve
Increasing inflation means unemployment goes down (inversely related)
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Policies to move along Philips curve
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A to B - Contractionary policy (examples of)
- B to A - Expansionary policy (examples of)
- Reducing unemployment
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Reasons for structural unemployment
- New trade, comparative advantage
- New technology, like fast trak
- Changes in consumer preferences
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Classical economists
Economy will fix itself
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Keynes
long run - everyone is dead
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Monetarists
- increase money supply at a steady rate, to allow for growth. GDP to go up, not as a policy for stabilization, just to keep up with increasing output.
- Stabilization policies will destabilize
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