Test3 Flashcards
Factors to shift planned investment function
Change in technology, change in expectations about future
Fiscal Policy
The federal government policies regarding government purchases (G) and taxes(T)
Two types of fiscal policy
Discretionary and Automatic
Discretionary Fiscal Policy
When government purposely changes G or T…Congress passes law
Automatic Fiscal Policy
Does not require any government action. Built in
Ricardian Equivalence
When G goes up by borrowing money, the people understand that means it substitutes future races for this year taxes
Supply side view of fiscal policy
Changes in tax rates will change supply of goods and services not demand
Suggestions for reducing federal deficit
Raise taxes, tax the rich, reduce expenditures
Laffer Curve
At first revenue goes up for the government, but at a point it goes down
Deficit
Amount by which government spending exceeds tax revenue collected for that year
National Debt
The total amount of money the federal government owes. All deficits added up
Gross Public Debt
All federal government debt regardless of who owns it
Net Public Debt
Gross public debt minus the debt owned by federal government agencies
Budget Philospohies
Annually Balanced budget, cyclically balanced budget, functional finance
Annually Balanced Budget
Fed. Gov. budget balanced every year
Cyclically Balanced Budget
Budget should be balanced every 5 or 10 years
Functional Finance
Doesn’t matter if budget is balanced. What is important is that congress pursue any policy to maintain full employment
Functions of Money
Medium of Exchange, Store of Value, Unit of Account
Medium of Exchange
You can use money to buy things
Store of Value
Can store ones wealth in money
Unit of Account
You can use money to compare the values of different things
M1 Measure
Currency of circulation, travelers checks, “demand deposits”
m2 measure of money
Savings at banks, time deposits at banks, money market mutual funds
Liquid asset
Easy to convert to money
Illiquid asset
Hard to convert to money
Double Coincidence of wants
Money fixes this
Fiduciary money
There nothing physical backing up our currency. We can’t get anything for dollar bills
People accept money because
Fed. gov. says they are legal tender and people think money will hold value
Multiplier Formula
1/1-MPC
Important
As you slide across the AE line, the price is fixed
