Fiscal/Monetary Mix And Loanable Funds Flashcards
Where are real interest rates determined
The loanable funds market
What is crucial in making investment decisions
The rate of interest
What is recognition lag
The time it takes to recognize the problem in the macroeconomy
What is implementation lag
The time that it takes to implement the policy action
What is impact/effect lag
Time that it takes for the policy action to have its effect on the economy
What is considered the inside lag
Recognition and implementation
What is considered the outside lag
Impact/effect lag
What is the recognition lag for fiscal policy and monetary policy
They are the same
Implementation lag of fiscal policy and monetary policy
Fiscal policy it is long for monetary policy it is short
What is the impact/effect lag for fiscal policy and monetary policy
Short for fiscal policy and long for monetary policy
What is significant about the overall lag times of both monetary and fiscal policies
They’re the same which is about one year
What does fiscal policy have such a long implementation lag time
Because it must go through the political process
What must fiscal and monetary policy be
Coordinated
Describe the money market
It measures our desire to hold M1
Supply controlled by the
Nominal interest rate
QM1$ on x axis
Nominal interest rate on y axis
Supply for money vertical
What does the loanable funds market supply
Investment money
Describe the loanable funds market graph
Quantity of loanable funds on x axis
Real interest rates on Y axis
Downward sloping DLF
Upward sloping SLF
What is the supply of loanable funds
Collective savings of all people At banks
Why is the supply of loanable funds upward sloping
Savings increase as real rates of interest increase
What is the demand for loanable funds
The total demand for borrowing
What does the demand for loanable funds include
All private investment spending and GOVERNMENT BONDING
What happens to the loanable funds market as the budget deficit increases
Real rates of interest increase
This decreases private investment
Government borrowing is spilling over to the money market
This could be a problem
All borrowed money comes from the same pool of money
What shifts when the budget deficit increases
The original demand for loanable funds which is private shifts outward into the right as DLF2 which is private and government
How does the process work for the crowding out effect
Expansionary fiscal policy means an increase in borrowing
Borrowing means an increase in demand for loanable funds
This increases the real rate of interest
Which might mute some of the fiscal policy stimulus
What is the reality of the crowding out effect
short run impact probably not as serious as shown
Fed is able to help w/ monetary policy
Crowding out -more of long-term problem due to increase in national debt borrowing causes
Increasing real rates of interest in the long run can hurt capital investment
Where is government debt bought and sold
The bond market
What Are the government securities that the bond market includes
Bills, notes, and bonds
Describe the liquidity of the bills notes and bonds
Highly liquid and very secure assets
Why do people buy bonds
To make either interest or profits
Through what is the bond market-driven
By supply and demand
What is bond yield
The bonds interest-rate
What is the bond market when other markets are volatile
Bond market is a safe haven
How do you calculate the yield of a bond
Coupon over price times 100
What happens to yield as bond prices go up
Yields decrease
What happens to yield’s as bond prices decrease
Yields increase
Why is there an inverse relationship between bond prices and yields
When an investor buys a bond they pay the price to earn the yield. Changing the price with the same coupon payment must change the yield
How is stagflation shown on the Phillips curve
It is an outward shift
What is the rational expectations school or the expectations in high inflation
Means people buy more now Causes increase in demand Causes prices to raise People want higher wages Supply decreases
What does the long-run Phillips curve look like
Just vertical
What does it mean the unemployment level is NAIRU
Rate where inflation doesn’t accelerate
What should someone watch in the long run growth and economic policy
Interest rates
What is the short run policy and what will it affect
Change AD to change GDP
These things will have implications on the long run
What are the factors for long-run economic growth
Capital investment Technological change Interest rates Growth in resources Efficiency growth
Increasing factors except for interest will boost LRAS
Where is the first place to look for the impact of a monetary and fiscal policy
Interest rates
What do interest rates affect
Capital investment
higher rates reduce investment and reduce future LRAS
How does expansionary fiscal policy affect LRAS
It increases interest rates which negatively impacts LRAS
How does contractionary fiscal policy impact LRAS
It decreases interest rates which has a positive impact on LRAS
How does easy or expansionary monetary policy impact LRAS
It reduces interest rates and increases investment which increases LRAS
What can fiscal policy include to impact LRAS
Changes in business taxes or possibly savings tax cuts
How would business taxes impact LRAS
Lower taxes on business capital investment will increase capital and increase LRAS
How well savings tax cuts impact LRAS
Lower taxes on savings income should increase the supply of loanable funds which decreases interest rates which increases investment and increases LRAS
What was the goal of Clintonomics
To reduce the deficit and national debt
What was the aim of Clintonomics
Keep long-run interest rates lower in the loanable funds market
Foster more investment in capital and technology and grow productive capacity
How do changes in supply affect the Phillips curve
It shifts it either outward or inward
How do changes in demand affect the Phillips curve
Causes movement along the Phillips curve
In the short run combining expansionary fiscal policy with tight monetary policy will most likely cause
A rise in interest rates
If Congress wanted to encourage growth of productive capacity in the economy already close to full employment, what should be done
Decrease in interest rates by engaging in open-market operations and raise taxes on personal income
What is the maturation period Of a bill
Less than a year can be a short as two weeks
Maturation of a note
Between one and seven years
Maturation of the bond
Longer than seven years with 30 years being the longest
