Review - Exam 3 Flashcards
Funds flow into the government in the form of?
Funds flow into the government in the form of taxes and government borrowing.
Why a large public debt may be a cause for concern?
A. It must still pay their debts which is paid back with tax revenue. B. People have to pay more for goods a services -> inflation. C. House mortgages increase because it’s tied to short-term interest rate set by the Fed -> lower values for homes. D. Crowding out -> increasing interest rates and the long-run growth. All this leads to: country loses its social, economic and political power. And implicit liabilities will be a problem because there’s a huge generation that leads to that a lot of tax revenue has to go to that.
Why is fiscal policy not the “go to” stabilization policy for the economy? Despite that, why did our current and previous Presidents, Obama and Bush, both sign fiscal stimulus packages into law?
A. Time lag: Government tries too hard -> unstable. Recessionary gaps can turn in to inflationary gaps by the time the fiscal takes effect -> economy gets worse than the beginning. It’s also a question about politics - getting things past the regulations. B. Increasing taxes to reduce AD causes problems -> it fall in productivity and AS could fall. C. Crowding out: government spends in the private sector.
D. It works when we’re in a great recession not when we’re in a garden little recession. Taxes has a more direct effect on consumers rather than interest rates. Monetary policy effects all sides of the economy while the fiscal policy can effect certain sectors.
Why would the government want to shift the AD curve?
Because it wants to close either a recessionary gap or an inflationary gap.
The relationship between savings and investment spending?
Higher savings means higher investment spending. Because there’s more money in the bank for the banks to lend out.
Who is harmed by counterfeit currency?
U.S. tax payers: counterfeit dollars reduces the revenues available to pay for the operations of the U.S. government. A fake 100 dollar bill in circulation is the same as a real if no one catches the fake bill because it serves as a part of the monetary base. Therefore, every fake 100 dollar bill in circulation means Fed print one less real 100 dollar bill. A counterfeit reduces T-bills the Fed can acquire, thereby reducing interest payments going to the Fed and U.S. Treasury. Tax payers, therefore, bears the real cost of counterfeit.
What are automatic stabilizers?
Any government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands.
Does the Fed buy bonds directly from the U.S. Treasury?
The Fed never buys U.S. Treasury bills directly from the federal government. If the fed buys U.S. Treasury bills directly from the federal government they cover their own deficit by printing money -> which leads to high inflation. When a central bank buys government debt directly from the government, it is lending directly to the government.
Structural deficits vs. cyclical deficits? What is passive vs. active fiscal policy?
Structural is to to balance your budget. Going into a cyclical deficit is to fix a recession. Active is the government actually do something - they print bills etc. And passive is automatic stabilizers.
What is money? And, it’s advantage compared to barter?
Instead of a computerized bartering system, we use money to implement complex exchanges. I sell consulting services for money, and I buy a suit using money. Money serves as a medium of exchange.
Why are some people so dissatisfied with the Fed’s monetary policy response to the financial crisis and recession?
It’s taking time and it doesn’t have as big of an impact as they though it would have.
How the actions of private banks and the Fed determine the money supply?
Open Market Operations.
What is barter? It’s main disadvantage?
Barter is a system of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. For example: Imagine an economy in which I can sell services as a consultant to banks, but what I want is to buy a new suit. The clothing store that sells suits does not have any use for my services as a banking consultant. The bank does not sell suits. How can barter work?
How the Fed uses open-market operations to change the money supply?
Buying or selling T-bills to determine money supply.
What are the mechanics for counter-cyclical policy? What are the 3 reasons to be cautious about fiscal policy?
It’s an increase or decrease in government spending, transfers or taxes.
Timing, crowding out and structural deficit. And automatic stabilizers?
