Macro Unit Four Flashcards
Expansionary monetary policy
the fed can increase the money supply to:
-decrease nominal interest rates, which will boost AD:
+increasing output (real GDP)
+decreasing unemployment
+decreasing deflation
consumption and investment are sensitive to interest rates
steps of expansionary monetary policy
- the fed increases the money supply
- AD increases because C and I increase
- Ad shifts right
contractionary money policy
the fed will decrease the money supply to:
-increase nominal rates, which will lower AD:
+decrease inflation (disinflation)
+decrease output (real GDP)
+increase unemployment
disinflation
a decrease in the rate of inflation
steps of contractionary money policy
- the fed decreases the money supply
- AD down because C and I down
- Ad shifts left
problem with tax cuts
the multiplier with government spending is larger than the multiplier with tax cuts
people save some of the money they receive from tax cuts
-using money to pay off debt is like saving
crowding out effect
occurs when government spending “crowds out” private sector spending
the government is demanding funds, increasing interest rates
reduces the spending multiplier
crowding out effect
- an increase in government spending
- an increase in AD
- an increase in price level
- an increase in money demand
- an increase in interest rates
- a decrease in investment
- a decrease in AD (AD doesn’t multiply as much as it should in 1)
crowding out
- AD up bc G up
- AD increases
- demand for money increases
- AD down bc I down
- AD decreases
supply side economics
fiscal policy aimed at increasing aggregate supply
-can affect both short-run and long-run aggregate supply
-ex. build roads: increases infrastructure
-ex. cut income taxes: increases worker productivity
-ex. reduction in business taxes or investment tax credits
+these are like subsidies for investors
liquidity trap
though interest rates are relatively low:
-people won’t borrow
-banks won’t lend
the money multiplier/velocity of money slows and the economy stays in a recession
average propensity to consume
the percentage of income that a consumer spends on average
consumption (in $) / income (in $) x 100
average propensity to save
100% - % average propensity to consume
marginal propensity to consume (MPC)
the likelihood of you spending the next dollar you earn
change in consumption (in $) / change in income (in $) x 100
should be between 0 and 1 or 0 and 100%
marginal propensity to save
1 - MPC
spending multiplier
a way to calculate how a change in spending will produce a larger change in income/GDP
mostly discussed with government spending, but affects all parts of GDP (C, I, G, NX)
spending multiplier (aka Keynesian spending multiplier)
1 / (1 - MPC) or 1 / marginal propensity to save
impact of government spending or tax cuts = spending multiplier x government spending (or tax cut)
fiscal policy (aka Keynesian economics/theory)
the change in tax rates or government spending by policymakers to influence an economy
-enacted by congress in the united states
mainly used to boost aggregate demand during recessions
effect of expansionary fiscal policy on AD
AD increases
fiscal policy—government spending
government spending is autonomous
an increase in government spending boosts GDP/aggregate demand through the spending multiplier
AD = Y + C + I + G + X
fiscal policy—tax cuts
the US federal government controls the rate at which businesses and households are taxed
a decrease in taxes increases consumption and investment, boosting GDP/aggregate demand
-corporate/business taxes = I
-income taxes = C
government’s balance sheet
debits = transfer payments and government purchases = total spending
credits = revenues from taxes = total revenue
budget deficit: spending > revenue
budget surplus: spending < revenue
debits
money going out
credits
money coming in
third fiscal policy—transfer payments
the transferring of money to citizens by the government
- affect AD through consumption
- ex. food stamps, stimulus checks
- do not count as government spending, do count toward deficit vs spending
