Fiscal/ Monetary policies

Question 1

Describe Recessionary Gap

Answer 1

When the quantity supplied is less than what we know we can produce on the institutional PPF at natural unemployment rate

Question 2

What is Say’s Law?

Answer 2

Supply creates it’s own demand.

Question 3

Define Inflationary Gap

Answer 3

When we are supplying more than what we can at institutional PPF

Question 4

What are the four main points of the Classical Theory of economics?

Answer 4

1) Say’s Law
2) wages, prices and interest rates are fully flexible
3) economy will self- regulate
4) leave economy be ( laissie fair)

Question 5

What two main graphs relate to

the Classical theory?

Answer 5

PPF & Aggregate market graph

Question 6

Why does the Classical Theory not work?

Answer 6

1) Wages cannot adapt as readily as believed

2) supply does not create demand

Question 7

How long did it take for rGDP to return to 1929’s rGDP?

Answer 7

10 years

Question 8

Why did Roosevelt’s New Deal work ?

Answer 8

Right when Roosevelt set out the New Deal the economy was not functioning at natural rate of employment so providing job opportunities though expanding the market and the convent WWII jobs the economy moved towards full employment.

Question 9

How was economists reaction to Black Thursday detrimental to the economy?

Answer 9

economists left the economy to be and allowed the economy to defaulted loans and bank
withdrawals ended several banks.

Question 10

Why is war not necessarily good for the economy?

Answer 10

War sends our labor force out of the country along with our capital.

Question 11

Draw the Aggregate market graph and label the long run equilibrium.Explain what is the long run equilibrium.

Answer 11

The long run equilibrium is the equilibrium that the economy regulates towards where the economy is not in a recessionary or inflationary gaps.

Question 12

What is the difference between the institutional and physical PPF’s?

Answer 12

the institutional ppt is them ppf at natural unemployment while the physical ppf is at 0% unemployment.

Question 13

List the beliefs of the Keynesian theory

Answer 13

1. Expectations
2. prices and wages are sticky, intrest rate is flexable
3. Q* is short-run equilibrium
4. Government should intervine

Question 14

Draw and explain the TE/TP graph

Answer 14

The Total Expenditures/Total productions graph is the short run equilibrium

Question 15

define the fiscal multiplier

Answer 15

change in nations income level affected by government spending

Question 16

Define expansionary policy

Answer 16

a fiscal policy that is done to expand the economy during a recessionary gap.

Question 17

Define contractionary policy

Answer 17

fical policy done during an inflationary gap to decrease the economy back to LR equilibrium

Question 18

What is meant by the term crowding out?

Answer 18

when government must finance its spending with taxes and/or with deficit spending, leaving businesses with less money and effectively “crowding them out.”

Question 19

What are the different types of lag times?

Answer 19

Data lag
wait-and- see lag
legislative lag
transmitition lag
effectiveness lag

Question 20

What are the two types of reserves?

Answer 20

required

excess

Question 21

Define M1.

Answer 21

currency held outside of banks + checkable deposits + Travelers checks

Question 22

What are the three functions of money?

Answer 22

1. Medium of exchange
2. Must store value
3. Standard of value

Question 23

What are the responsibilities of the FED?

Answer 23

1. Control the money supply
2. Supply economy with paper money
3. Provide check clearing
4. Hold depositories institutions reserves
5. Supervisor of banks
6. Governments banker
7. Lender of last resort
8. Fiscal agent of the treasury

Question 24

What are the tree toold of federal monetary policies?

Answer 24

reserve requirement, discount rate, open market

Question 25

How is the FED Structured?

Answer 25

Board of Governors
Federal Market Committee
Federal distracts
city banks

Question 26

What are the beliefs of the monerterism theory?

Answer 26

Monetarism (theory)- believers are called monetarist
1- Velocity changes in a predictable way
2- M(V)=AD=C+I+G+(Ex-Im)
3- Short run aggregate supply is upward sloping
4-the economy is self-regulating (Prices and wages are flexible)
5-In summary: changes in M & V can change P& Q in the short run but only P in long run
Inflation created when you increase money supply

Question 27

What is the equation of exchange?

Answer 27

MV=PQ (belief in moneterism in SR equilibrium)

Question 28

What is the difference between one shot and continued inflation?

Answer 28

one shot only occures once affrects both the supply or demand curve

Question 29

Keynesian mechanism

Answer 29

Money market, problem that can occur is the liquity trap

Question 30

monerteristic mechanisms

Answer 30

Q=Qn

Question 31

What is the liquidity trap?

Answer 31

as interest rate goes down the demand slowly then tappers off over time. Meaning that there are times when both Q* and Q*n are impossible to achieve due to interest rate disinterest.

Question 32

How are interest rates and bond prices related?

Answer 32

as interest rate decreases so does bond price, inversely as interest rate increases bond price increases

Question 33

Compare and contrast the three theories of the economy.

Answer 33

The essay question, base rating on how much info can be handwritten and graphed.