Chapter 14 & 15 Flashcards
Expansion vs contractionary
Deficit vs Surplus
CONTRACT: raise interest rate to discourage lending, tax more to get rev, spend less than what you are getting from taxes so it’s a surplus
EXPANSION: lower interest rates, spending more than you are taxing ppl … spending money on programs that results in expanding econ.
Rev < Expenses= Deficit
Rev > Expenses = Surplus
Increase in deficit or decrease in surplus
expansionary
increases GDP
Rev < Expenses= Deficit
Rev > Expenses = Surplus
Govt is spending money (expenses) to expand the econ, so increasing spending beyond the amount of taxes (Rev) the receive.
Decrease in deficit or increase in surplus
contractionary
decrease GDP
Rev < Expenses= Deficit
Rev > Expenses = Surplus
Gov is taxing to get rev and not spending money (expenses) to expand econ
GDP definition
GDP is the total of all value added created in an economy.
Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period.
If real interest rate on govt debt is higher than growth rate of econ, what happens to debt ratio?
It will increase over time (keeping tax rate constant).
If real interest rate on govt. debt is lower than real growth in GDP, what happens to debt ratio?
Decrease over time (i.e improve).
Fiscal Multiplier
Definition
Formula
Definition
Fiscal * govt spending = Increase in consumption.
Changes in govt spending effect on agg demand because ppl who have income increase from increase govt. spending will increase their spending, which increases income and spending in others.
Marginal propensity to consume (MPC), which quantifies the increase in consumer spending, as opposed to saving, due to an increase in the income of an individual, household, or society.
Fiscal Multi with govt. spending
govt. spending goes up and so does consumption
Fiscal Multiple for increase tax of 100 billion
Taxes go up and consumption go down.
100 tax increase,
Fiscal policy
Fiscal policy refers to a government’s use of spending and taxation to influence economic activity.
Monetary Policy
Monetary policy refers to the central bank’s actions that affect the quantity of money and credit in an economy to influence economic activity.
Automatic Stablizer
Increase (Decrease) in transfer payments (ex. unemployment compensation)
Taxes and transfer pmts tend to increase deficient during recession
and decrease deficient during expansion.
increasing money supply
Fed buys bonds in open market, it increases money supply in econ by swapping out bonds in exchange for cash to general public.
decreasing money supply
Fed sells bonds, it decrease the money supply by removing cash from econ in exchange for bonds.
When central bank buys security what are the effect on economy and agg demand?
6 bullet points
When central bank decreases policy rate, what are the effects of econ and agg demand?
7 bullet points
