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Macroeconomics SEM 2 > Monetary + Fiscal Policy > Flashcards

Monetary + Fiscal Policy Flashcards

1
Q

Where do you find LR Equilibrium in the economy?

A

Natural Rate of Output

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2
Q

In LR- why does AD = SRAS as well?

A

Expected Prices = Actual Prices

- Expectations adjust to Actual levels

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3
Q

What are the main causes for Demand driven Fluctuations?

A
  • Pessimism
  • Stock Market bust
  • Fall in Exports- Recession Abroad
  • Monetary Contraction- e.g. Disinflation
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4
Q

What is the Result of a Demand driven Recession?

A

Decreased Y

Decreased Price Level

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5
Q

What happens to SRAS over time?

A

Shifts to RIGHT
- Y Increases back to NRO + Price Level Falls further
Decreased AD ——> Increased SRAS

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6
Q

What are the main causes of Supply driven Fluctuations?

A
  • Sudden Increase in CoPs

- Increased Price Expectations

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7
Q

What is the Result of a AS driven Recession?

A

Decreased Y
Increased Price Level
— STAGFLATION

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8
Q

In response to a LEFT Shift in SRAS–> Stagflation, what can policy makers do to immediately correct the issue + what is the cost of the policy?

A

Increase AD

- BUT–> Inflation

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9
Q

How can Monetary Policy be used to Increase AD?

A

Increase M.S –> Decreased I.R at each PL –> Increase AD –> Increased Y + Increased PL

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10
Q

How can Monetary Policy be used to Decrease AD?

A

Decrease M.S –> Increased I.R at each PL –> Decrease AD –> Decreased Y + Decreased PL

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11
Q

What are the 2 main Monetary Policy tools used by C.Bs?

A
  • Discount Rate
  • Open Market Operations
    Changing M.S –> changes I.R –> Changes AD
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12
Q

What is Fiscal Policy?

A

Changes in Gov. Spending +/ Taxes

- Directly Shifts AD

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13
Q

What is the Size of Impact of Fiscal Policy affected by?

A
  • Multiplier Effect- Amplifies effect

- Crowding-out effect- Diminishes effect

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14
Q

How does the Multiplier Effect affect AD?

A

Shifts AD further to RIGHT beyond the Initial Shift

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15
Q

What does the Size of the Spending Multiplier depend on?

A

Depends on MPC

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16
Q

How does MPC affect Multiplier?

A

Higher MPC ––> Higher Multiplier

17
Q

How is the Multiplier effect caused?

A

Increased C + I –> Increased Jobs –> Increased Income –> Higher C –> Increased Profitability –> Increased I –> Increased AD –> etc.

18
Q

What is MPC?

A

Marginal Propensity to Consume

- Fraction of additional income spent on Consumption

19
Q

What is the Multiplier equation?

A

m = 1 ÷ ( 1 - MPC )

20
Q

How does the Crowding Out Effect affect AD?

A

Shifts AD back to LEFT slightly

_ Partially Offsets initial Increase in AD

21
Q

How is Crowding out effect caused?

A

Increased AD –> Increased Income –> Increased M.D –> Higher I.R –> Decreased Investment –> Lower AD

22
Q

What does the Actual effect of Fiscal Policy on AD depend on?

A

Depends on Size of Multiplier Effect RELATIVE to Size of Crowding Out Effect

23
Q

What is Active Stabilisation Policy?

A

Use Fiscal Policy + Monetary Policy to Stabilise economy in shocks + waves of Optimism & Pessimism (Animal Spirits)

24
Q

What is the Objective of Active Stabilisation Policy?

A

Ensure Full-employment + Stable Inflation

25
Q

What does Keynesians say about Policy for Stabilisation?

A

Stress the key role of AD in explaining SR Fluctuations

  • Gov. should actively stimulate AD
    • To maintain Full Employment
26
Q

What is the Case AGAINST Active Stabilisation Policy?

A
  • AD difficult to control- due to Time Lags
  • Policy must be based on unreliable economic forecasts
    THEREFORE- Better to leave Economy alone- Let Market Mechanisms deal with SR Fluctuations
  • Instead use Policy for LR goals
27
Q

What are Automatic Stabilisers?

A

Automatic changes in Spending that stimulate AD when Economy goes into Recession

28
Q

What are the 2 main Automatic Stabilisers that Reduce the impact of a Recession?

A
  • Decreased Taxes –> Increased C + I –> Increased AD –> Increased Y + PL
  • Increased Unemployment Benefits –> Increased C –> Increased AD –> Increased Y + PL
    Opposite in a BOOM
29
Q

What are the Limitations of Automatic Stabilisers?

A
  • Not strong enough to prevent Business-cycles completely
  • Strength depends on Public Sector size relative to GDP
    BUT- without Automatic Stabilisers- Output + Employment more Volatile

Macroeconomics SEM 2 (13 decks)

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