Chapter 11 Flashcards
What 2 things shift LRAS to the right in the Keynesian model?
Growth in tech
Growth in labor force
What is AS?
Output of all final g/s
What is AD?
Sum of expenditures on final g/s by h/h, business, government and foreigners
What is the multiplier effect?
When output increases and income increases
What is expansionary fiscal policy?
Increase in government spending/cut in taxes
What is contractionary fiscal policy?
Austerity
Decrease in government spending/increase in taxes
What is fiscal policy?
Policies of taxation and government spending
What is monetary policy?
Policies if interest rates and money supply
What is expansionary monetary policy?
Decrease in interest rates as a result of increase in money supply
What is contractionary monetary policy?
Increase in interest rates as a result of a decrease in the money supply
What are problems with fiscal policy?
Inflationary bias
Multipliers
What is open market operations?
Selling bonds shrinks the money supply and rises interest rates
What is the exchange rate effects of expansionary monetary policy?
Increases bank reserves and interest rates fall, income rises and depreciation of exchange rate
What is the exchange rate effects of contractionary monetary policy?
Reduces bank reserves, interest rates rise and appreciation exchange rate
What is the exchange rate effect of expansionary fiscal policies?
As income rises of h/h, they hold more money and demand for money rises - consume more so they need more
Interest rates rise - inflow of foreign capital and exchange rate falls
What is the exchange rate effect of contractionary fiscal policies?
Fall in spending and rise in taxes causes income and demand for money to fall so interest rates fall and exchange rates rise
How does the expansionary monetary policy affect CA?
Increase in money supply reduces interest rates and depreciation in currency
This depreciation causes expenditure switching - foreign to domestic BUT not with an economy with fixed exchange rate
CA rises or falls
How does the contractionary monetary policy affect CA?
Interest rates rise, appreciation in currency, imports are cheaper - domestic to foreign goods
CA rises or falls
How does the expansionary fiscal policy affect CA?
Interest rates rise, exchange rate appreciation - domestic to foreign so CA falls - imports rise
How does the contractionary fiscal policy affect CA?
Interest rates falls, exchange rate depreciation - foreign to domestic so CA rises - imports falls
