AP Econ Macro Chapter 5 Flashcards
What are some problems with fiscal policy implementation?
Lag time
Types of lag time?
- Data collection lag
- Takes time to gather data.
- Decision-making lag
- Takes time for policy makers to deside on a proper policy.
- implementation lag
- Takes time to actually affect the economy.
2 Catagories of fiscal policy
- Automatic stabilizers
- Stimulate AD
- Include taxes and some form of **government spending **
- GDP up, income up, amount of taxes paid up.
- Discretionary Fiscal policy
1.
What is expansionary fiscal policy?
Increase G and keep taxes constant
decrease taxes and keep G constant
Increase G and taxes by the same amount (balanced budget mutiplier)
Affects of Crowning Out
Interest rates up
investment down
lower stock of goods
less economic growth
Expantionary fiscal policy causes a budget ______ and a budget ______ over time adds up to the national (public) ______
Deficit, deficit, debt
How does the government get money it doesn’t have?
They borrow the money by issuing government securities (treasuries) and selling them to the public.
How will the impact of incresed borrowing be illustrated using a money market graph?
Increase MD
Increase Interest rates
Decrease investments
Decrease AD
The reduction in investment that results when a fiscal expansion raises the interest rate is called the crowning out effect
This tends to dampen the affect on AD
How do high interest rates effect long run growth?
Decrease investments which leads to a smaller stock of capital goods and a smaller stock of capital growth means lower Long-run economic growth.
What is expansionary monetary policy?
Buy government securities
Lower the discount rate
Lower the reserve requirement
What impact does expansionary monetary policy have on interest rates?
Lowers interest rates in the long run
What impact may expantionary monetary policy leading to lower interest rates have on economic growth?
Increase investment which leads to larger stoc of capital goods which leads to greater economic growth
What are the concerns of expansionary monetary policy?
Causes more debt
In the long run interest rates will return to LR equilibrium
In the long run Money is neutral and will not affect real variables in the LR
Summary of Expansionary policy?
- Fiscal increase interest rates
- monetary decreases interest rates
- Both increase AD in the SR
- But, fiscal policy may decrease LR growth while monetary plicy may increase LR growth
What is contractionary fiscal policy?
Decrease in G while keeping taxes constant
Increasing taxes while keeping G constant
Decreasing both G and taxes by the same amount (balanced Budget Multiplier)
Contractionary fiscal policy causes a budget ______ which can lead to a reduce in the national (public) ______
Surplus, Debt
What impact does the government have by decreasing Borrowing? How would this be illistrated on a money market graph?
A decrease in MD
A decrease in Interest rate
An increase in investment
Increase AD
What affects does the Crowning in effect have?
Reduced interest rates
The crowning in effect my offset some of the contractionary fiscal policy but be better for LR growth.
Increase investment which leads to greater stock capital goods and greater stock of capital goods leads to a greater LR growth
What does contractionary monetary policy consist of?
Selling government securities
Raising the discount rate
raising the reserve raquirement
What concerns do we have with contractionary monetary policy
Could cause a recession
In LR the real interset rates will return to LR equilibrium
In the LR money is neutral and will not affect real variables in the LR
What impact does contractionary monetary policy have on interest rates? What impact might this have on LR economic growth?
Higher interesat rates cause decrease investment
smaller investment leads to less stock of capital goods and less stock of capital goods causes lower LR economic growth.
What causes a shupply shock?
A decrease in SRAS
What does a supply shock cause?
Higher unemployment and increase in PL.
This is known as stagflation.
The misery index is the unemployment rate + the inflation rate XD
What problems doe traditional fiscal and monetary policies have in dealing with a supply shock?
Monetary policy only affects AD
Traditional Kaynesian fiscal policy is more effeatctive at influencing AD
What policies could be enacted to counter a supply shock
Supply-side economics
- Increase subsidies to businesses
- decrease taxes on businesses
- reduce regulation on businesses
Supply-side economists say the and decrease in personal income taxes may lead to…
an increase of incentive to work and therefore an increase in productivity
If productivity increases what is the inpact on SRAS?
SRAS up
What are criticisms of supply-side theory?
- Critics counter that personal income taxes decreases are moer effective at increasing AD than SRAS
- They also say that it is impossible to determine the current point on the Laffer curve
- They also claim that getting rid of regulations may harm consumers and workers and erode consumer confidence
- They say that subsidies are “corporate welfare”
- They say that businesses should pay their fair shares of taxes and business taxes may be too low.
What is the impact of expansionary fiscal policy on a money market and loanable funds market?
Money demand up
Demand of loanable funds up
what must the Fed do to couteract high MD and high demand of loanable funds and how are each market affected?
The Fed can buy treasury securities in open market operations to counteract the increase the increase of MD and demand of loanable funds.
MS up
Supply of loanable funds up
Lable the following Phillips Curve
What is the relationship between inflation and unemployment?
Phillips Curve
short run trade off
one up other down
What is the short run relationship between shifts in AD and the Phillips Curve?
When AD shifts left there is higher unemployment but lower inflation
When AD shifts right there is higher inflation but lower unemployment
What does the LRPC represent?
natural rate of unemployment
How are unemployment and inflation related in the LR?
They are not related in the LR.
In the LR how does expected inflation adjust to actual inflation
The actual inflation will go to the expected inflation
What causes a shift in the SRPC and which direction?
Shocks of SRAS
decrease in SRAS - increase in SRPC
