Midterm 3 Flashcards
what causes inflation in the long run
the quantity of money grows faster than the potential GDP
what are the two sources of inflation
Demand Pull
Cost Push
what is demand pull inflation
inflation that starts because aggregate demand increases
what is cost push inflation
inflation that starts with an increase in costs
what are the sources of increased costs leading to cost push inflation
an increase in the money wage rate
an increase in the money price of raw materials
what is stagflation
the combination of rising price levels and decreasing real GDP
what is a rational expectation forecast
an inflation forecast based on all relevant information
what is deflation
when an economy has persistently decreasing price levels
what causes deflation
aggregate demand increases at a persistently slower rate than aggregate supply
what are the consequences of deflation
unanticipated deflation redistributes income and wealth, lowers real GDP and employment, and diverts resources from production
how can deflation be ended
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
what is the Philips curve
a curve that shows the relationship between the inflation rate and the unemployment rate
what is the short run Philips curve
a philips curve where the expected inflation rate and the natural unemployment rate are held constant
what is the long run Philips curve
the Philips curve when the actual inflation rate equals the expected inflation rate
what is the federal budget
the annual statement of the federal Govs outlays and revenues
what are the two purposes of the federal budget
finance the activities of the federal government
achieve macroeconomic objectives
what is fiscal policy
the use of the federal budget to achieve macroeconomic objectives such as full employment, sustained economic growth, and price level stability
what is the budget balance
federal revenues minus outlays
can be surplus, deficit, or balanced
what is government debt
the total amount that the government is borrowing
what are the supply side effects of fiscal policy
the effects on employment, potential GDP, and aggregate supply
what is fiscal stimulus
the use of fiscal policy to increase production and employment
what is automatic fiscal policy
policy action triggered by the state of the economy without government action
what is discretionary fiscal policy
policy action that is initiated by an act of parliament
what are the two items in the government budget that change automatically
tax revenues
outlays
what does automatic stimulus do in a recession
tax revenues decrease and outlays increase automatically stimulating the economy to shrink the recessionary gap
what does automatic stimulus do in a boom
tax revenues increase and outlays decrease the the budget automatically retains the economy to shrink the inflationary gap
what is the structural surplus or deficit
the budget balance that would occur if the economy were at full employment and real GDP were equal to potential GDP
what is the cyclical surplus or deficit
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
what does discretionary fiscal stimulus focus on
effecting aggregate demand
what are the two main fiscal multipliers
government expenditure multiplier
tax multiplier
what is the government expenditure multiplier
the quantity effect of a change in government expenditure on real GDP
what is the tax multiplier
the quantity effect a change in taxes has on aggregate demand
what are the three time lags hampering fiscal policy
recognition lag
law-making lag
impact lag
what is the objective of the BOC and monetary policy
control the quant of money and interest rates to avoid inflation and when possible prevent excessive swings in real GDP growth and unemployment
what is inflation rate targeting
targeting a certain change in the total CPI
what are the two main benefits of adopting an inflation control target
fewer surprises and mistakes on the part of savers and investors
anchors expectations about future inflation
what are critics fears about inflation control targeting
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
what are the three possible monetary policy instruments
the quantity of money(monetary base)
the exchange rate
the short term interest rate
what is the BOC’s choice of intruments
the short term interest rate, specifically the overnight loans rate
what is the overnight loans rate
the interest rate on overnight loans that large banks make to eachother
what tools does the BOC use to hit the target overnight rate
the operating band
open market operations
what is the operating band
the target overnight loans rate +- 0.25 percentage points
what is the bank rate
the interest rate the bank charges big banks on loans set 0.25 bps above the target overnight rate
what is the settlement balances rate
the interest rate the BOC pays on reserves set 0.25 bps below the target overnight rate
