Chapter 14: Countercyclical Macroeconomic Policy Flashcards
Countercyclical Policies
Attempt to reduce the intensity of economic fluctuations and smooth the GDP growth rate
Expansionary Policy
Aims to reduce the severity of an economic recession by shifting labor demand to the right ad expanding economic activity .
Contractionary Policy
This is used to slow down the economy when it grows too fast.
How can contractionary policy reduce inflation?
By slowing the growth rate of the money supply.
How can contractionary policy reduce risks of an extreme contraction?
By trying to cool off the economy before it overheats.
Expansionary Fiscal Policy
Uses higher government expenditure and lower taxes to increase the growth rate of real GDP
Contractionary fiscal Policy
Uses lower government expenditure and higher taxes to reduce the growth rate of real GDP.
Automatic Countercyclical Components
Are aspects of fiscal policy that automatically partially offset economic fluctuations like unemployment insurance and food stamps.
Discretionary countercyclical
Are aspects of fiscal policy that policymakers deliberately enact in response to economic fluctuations. Like the 787 Billion dollar American recovery and investment act.
What is the government expenditure multiplier?
It is the change in GDP resulting from a $1 change in government expenditures.
Crowding Out
Occurs when rising government expenditures partially or even fully displace expenditures by households and firms.
National Income Accounting identity
Y=C+I+G+X-M
What would happen under a $1 dollar increase in G?
Y+1=C+1+G+1+X-M
In the credit market equilibrium what happens?
The supply curve goes up and the credit demand goes down.
What is the right scenario?
When the multiplier is larger when the economy is well below trend and close to zero when the economy is close to potential .
