unit 3 test Flashcards
what is monetary policy
policies done by the federal reserve
what is fiscal policy
policies done by government efforts to promote full employment and price stability
what does fiscal policy change
government spending
taxes
recession is combated with which fiscal policy
expansionary policy
increase govt spending
decrease personal income taxes
increase transfer payments
inflation is combated with which fiscal policy
contractionary policy
decrease govt spending
increase personal income taxes
decrease transfer payments
when taxes lower
consumption and disposable income both increase
discretionary
involves policy makers doing fiscal policy in response to economic problem
automatic
takes place without policy makers having to respond to current economic problem
automatic examples
unemployment compensation and marginal tax rates
weakness of fiscal policy
outside, inside lag, and political motivation
inside lag
takes time to recognize economic problem and to promote solutions to problem
outside lag
takes time to implement solutions to problem
GDP and unemployment rate
inverese relation (opposite)
Price level and inflation rate
direct relation (same)
if inflated
workers demand higher nominal wages
(fixed the economy)
if recession
workers will work for lower nominal wages
(fixed the economy)
three names for a shift to the left of the aggregate supply line
negative supply shock, stagflation, cost push inflation
what is on the ID graph
r% or i% on y axis
Ig on x axis
LRAS
period of time where input prices are completely flexible and adjust to changes in price level
level of RGDP is independent of price level
when changing interest rates or price
it moves along the line
SRAS
period of time where input prices are sticky
nominal wages are slow to fall even in high unemployment
(directly related RGDP and price level)
what shifts the SRAS line
input prices/nominal wages
productivity
legal institution environment
capital stock
aggregate meaning
adding all together
aggregate demand relation with RGDP and price level
inverse relationship
political motivation
politicians face re election and more likely to support expansionary than contractionary fiscal policy (lower taxes and increase govt spending)
three reasons AD is downward sloping
real balances effect (wealth effect)
interest rate effect
foreign purchases effect
real balances effect (wealth effect)
price levels vs. purchasing power
(price level high, households cannot afford as much)
(price level low, households can buy more)
interest rate effect
real interest rate vs investment
higher price level = increase interest rate = discourage investment
foreign purchases effect
higher price level increases demand for relatively cheaper imports
disposable income
gross income - taxes
income after taxes
two types of fiscal policy
discretionary and automatic
which has a bigger impact (decrease taxes or increase govt spending)
increase govt spending because no savings left
would need to decrease taxes a lot more than the amount increased of spending
how do businesses determine the amount of investment they undertake
expected return>interest cost, then invest
expected return<interest cost, then don’t invest
shifts in ID (investment demand)
cost of production
business taxes
technological change
stock of capital
expectations
what moves along line in ID
interest rate change
monetary policy
promote maximum employment, stable prices, moderate long term interest rates
