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AP Economics > Fiscal/Monetary Mix And Loanable Funds > Flashcards

Fiscal/Monetary Mix And Loanable Funds Flashcards

0
Q

Where are real interest rates determined

A

The loanable funds market

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1
Q

What is crucial in making investment decisions

A

The rate of interest

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2
Q

What is recognition lag

A

The time it takes to recognize the problem in the macroeconomy

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3
Q

What is implementation lag

A

The time that it takes to implement the policy action

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4
Q

What is impact/effect lag

A

Time that it takes for the policy action to have its effect on the economy

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5
Q

What is considered the inside lag

A

Recognition and implementation

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6
Q

What is considered the outside lag

A

Impact/effect lag

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7
Q

What is the recognition lag for fiscal policy and monetary policy

A

They are the same

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8
Q

Implementation lag of fiscal policy and monetary policy

A

Fiscal policy it is long for monetary policy it is short

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9
Q

What is the impact/effect lag for fiscal policy and monetary policy

A

Short for fiscal policy and long for monetary policy

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10
Q

What is significant about the overall lag times of both monetary and fiscal policies

A

They’re the same which is about one year

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11
Q

What does fiscal policy have such a long implementation lag time

A

Because it must go through the political process

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12
Q

What must fiscal and monetary policy be

A

Coordinated

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13
Q

Describe the money market

A

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

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14
Q

What does the loanable funds market supply

A

Investment money

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15
Q

Describe the loanable funds market graph

A

Quantity of loanable funds on x axis
Real interest rates on Y axis

Downward sloping DLF
Upward sloping SLF

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16
Q

What is the supply of loanable funds

A

Collective savings of all people At banks

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17
Q

Why is the supply of loanable funds upward sloping

A

Savings increase as real rates of interest increase

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18
Q

What is the demand for loanable funds

A

The total demand for borrowing

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19
Q

What does the demand for loanable funds include

A

All private investment spending and GOVERNMENT BONDING

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20
Q

What happens to the loanable funds market as the budget deficit increases

A

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

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21
Q

What shifts when the budget deficit increases

A

The original demand for loanable funds which is private shifts outward into the right as DLF2 which is private and government

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22
Q

How does the process work for the crowding out effect

A

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

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23
Q

What is the reality of the crowding out effect

A

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

24
Q

Where is government debt bought and sold

A

The bond market

25
Q

What Are the government securities that the bond market includes

A

Bills, notes, and bonds

26
Q

Describe the liquidity of the bills notes and bonds

A

Highly liquid and very secure assets

27
Q

Why do people buy bonds

A

To make either interest or profits

28
Q

Through what is the bond market-driven

A

By supply and demand

29
Q

What is bond yield

A

The bonds interest-rate

30
Q

What is the bond market when other markets are volatile

A

Bond market is a safe haven

31
Q

How do you calculate the yield of a bond

A

Coupon over price times 100

32
Q

What happens to yield as bond prices go up

A

Yields decrease

33
Q

What happens to yield’s as bond prices decrease

A

Yields increase

34
Q

Why is there an inverse relationship between bond prices and yields

A

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

35
Q

How is stagflation shown on the Phillips curve

A

It is an outward shift

36
Q

What is the rational expectations school or the expectations in high inflation

A 
Means people buy more now
Causes increase in demand
Causes prices to raise
People want higher wages
Supply decreases
37
Q

What does the long-run Phillips curve look like

A

Just vertical

38
Q

What does it mean the unemployment level is NAIRU

A

Rate where inflation doesn’t accelerate

39
Q

What should someone watch in the long run growth and economic policy

A

Interest rates

40
Q

What is the short run policy and what will it affect

A

Change AD to change GDP

These things will have implications on the long run

41
Q

What are the factors for long-run economic growth

A 
Capital investment
Technological change
Interest rates
Growth in resources
Efficiency growth

Increasing factors except for interest will boost LRAS

42
Q

Where is the first place to look for the impact of a monetary and fiscal policy

A

Interest rates

43
Q

What do interest rates affect

A

Capital investment

higher rates reduce investment and reduce future LRAS

44
Q

How does expansionary fiscal policy affect LRAS

A

It increases interest rates which negatively impacts LRAS

45
Q

How does contractionary fiscal policy impact LRAS

A

It decreases interest rates which has a positive impact on LRAS

46
Q

How does easy or expansionary monetary policy impact LRAS

A

It reduces interest rates and increases investment which increases LRAS

47
Q

What can fiscal policy include to impact LRAS

A

Changes in business taxes or possibly savings tax cuts

48
Q

How would business taxes impact LRAS

A

Lower taxes on business capital investment will increase capital and increase LRAS

49
Q

How well savings tax cuts impact LRAS

A

Lower taxes on savings income should increase the supply of loanable funds which decreases interest rates which increases investment and increases LRAS

50
Q

What was the goal of Clintonomics

A

To reduce the deficit and national debt

51
Q

What was the aim of Clintonomics

A

Keep long-run interest rates lower in the loanable funds market

Foster more investment in capital and technology and grow productive capacity

52
Q

How do changes in supply affect the Phillips curve

A

It shifts it either outward or inward

53
Q

How do changes in demand affect the Phillips curve

A

Causes movement along the Phillips curve

54
Q

In the short run combining expansionary fiscal policy with tight monetary policy will most likely cause

A

A rise in interest rates

55
Q

If Congress wanted to encourage growth of productive capacity in the economy already close to full employment, what should be done

A

Decrease in interest rates by engaging in open-market operations and raise taxes on personal income

56
Q

What is the maturation period Of a bill

A

Less than a year can be a short as two weeks

57
Q

Maturation of a note

A

Between one and seven years

58
Q

Maturation of the bond

A

Longer than seven years with 30 years being the longest

AP Economics (8 decks)

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