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Macro Econ > Midterm 3 > Flashcards

Midterm 3 Flashcards

1
Q

what causes inflation in the long run

A

the quantity of money grows faster than the potential GDP

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2
Q

what are the two sources of inflation

A

Demand Pull
Cost Push

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3
Q

what is demand pull inflation

A

inflation that starts because aggregate demand increases

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4
Q

what is cost push inflation

A

inflation that starts with an increase in costs

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5
Q

what are the sources of increased costs leading to cost push inflation

A

an increase in the money wage rate
an increase in the money price of raw materials

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6
Q

what is stagflation

A

the combination of rising price levels and decreasing real GDP

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7
Q

what is a rational expectation forecast

A

an inflation forecast based on all relevant information

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8
Q

what is deflation

A

when an economy has persistently decreasing price levels

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9
Q

what causes deflation

A

aggregate demand increases at a persistently slower rate than aggregate supply

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10
Q

what are the consequences of deflation

A

unanticipated deflation redistributes income and wealth, lowers real GDP and employment, and diverts resources from production

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11
Q

how can deflation be ended

A

by increasing the growth rate of money
make the money growth rate exceed the growth rate of real GDP minus the rate of velocity change

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12
Q

what is the Philips curve

A

a curve that shows the relationship between the inflation rate and the unemployment rate

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13
Q

what is the short run Philips curve

A

a philips curve where the expected inflation rate and the natural unemployment rate are held constant

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14
Q

what is the long run Philips curve

A

the Philips curve when the actual inflation rate equals the expected inflation rate

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15
Q

what is the federal budget

A

the annual statement of the federal Govs outlays and revenues

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16
Q

what are the two purposes of the federal budget

A

finance the activities of the federal government
achieve macroeconomic objectives

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17
Q

what is fiscal policy

A

the use of the federal budget to achieve macroeconomic objectives such as full employment, sustained economic growth, and price level stability

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18
Q

what is the budget balance

A

federal revenues minus outlays
can be surplus, deficit, or balanced

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19
Q

what is government debt

A

the total amount that the government is borrowing

20
Q

what are the supply side effects of fiscal policy

A

the effects on employment, potential GDP, and aggregate supply

21
Q

what is fiscal stimulus

A

the use of fiscal policy to increase production and employment

22
Q

what is automatic fiscal policy

A

policy action triggered by the state of the economy without government action

23
Q

what is discretionary fiscal policy

A

policy action that is initiated by an act of parliament

24
Q

what are the two items in the government budget that change automatically

A

tax revenues
outlays

25
Q

what does automatic stimulus do in a recession

A

tax revenues decrease and outlays increase automatically stimulating the economy to shrink the recessionary gap

26
Q

what does automatic stimulus do in a boom

A

tax revenues increase and outlays decrease the the budget automatically retains the economy to shrink the inflationary gap

27
Q

what is the structural surplus or deficit

A

the budget balance that would occur if the economy were at full employment and real GDP were equal to potential GDP

28
Q

what is the cyclical surplus or deficit

A

the actual surplus or deficit minus the structural surplus or deficit
the deficit or surplus that occurs purely because real GDP does not equal potential GDP

29
Q

what does discretionary fiscal stimulus focus on

A

effecting aggregate demand

30
Q

what are the two main fiscal multipliers

A

government expenditure multiplier
tax multiplier

31
Q

what is the government expenditure multiplier

A

the quantity effect of a change in government expenditure on real GDP

32
Q

what is the tax multiplier

A

the quantity effect a change in taxes has on aggregate demand

33
Q

what are the three time lags hampering fiscal policy

A

recognition lag
law-making lag
impact lag

34
Q

what is the objective of the BOC and monetary policy

A

control the quant of money and interest rates to avoid inflation and when possible prevent excessive swings in real GDP growth and unemployment

35
Q

what is inflation rate targeting

A

targeting a certain change in the total CPI

36
Q

what are the two main benefits of adopting an inflation control target

A

fewer surprises and mistakes on the part of savers and investors
anchors expectations about future inflation

37
Q

what are critics fears about inflation control targeting

A

by focusing on inflation, the bank might permit the unemployment rate to rise or real GDP to slow
the bank might permit the value of the dollar to rise not eh forex market and make exports suffer

38
Q

what are the three possible monetary policy instruments

A

the quantity of money(monetary base)
the exchange rate
the short term interest rate

39
Q

what is the BOC’s choice of intruments

A

the short term interest rate, specifically the overnight loans rate

40
Q

what is the overnight loans rate

A

the interest rate on overnight loans that large banks make to eachother

41
Q

what tools does the BOC use to hit the target overnight rate

A

the operating band
open market operations

42
Q

what is the operating band

A

the target overnight loans rate +- 0.25 percentage points

43
Q

what is the bank rate

A

the interest rate the bank charges big banks on loans set 0.25 bps above the target overnight rate

44
Q

what is the settlement balances rate

A

the interest rate the BOC pays on reserves set 0.25 bps below the target overnight rate

45
Q
A

Macro Econ (3 decks)

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