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Econ / Financial Literacy > Unit 4: Macroeconomics > Flashcards

Unit 4: Macroeconomics Flashcards

1
Q

Who is in control of Fiscal Policy?

A

Government- President and Congress

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2
Q

What is the goal of Fiscal policy?

A

Have full employment

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3
Q

When does the government use Contraction Fiscal policy?

A

When worried about inflation

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4
Q

Two things Fiscal Policy can do with contractionary policy

A
  • Decrease government spending

- Increase taxes

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5
Q

When does the Fiscal Policy use Expansionary policy?

A

When economy is in recession/ depression

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6
Q

The Two things they can do to implement expansionary policy?

A

Increase spending

Cut taxes

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7
Q

What is the problem with Fiscal Policy?

A

Political factors, time lags, forecasting difficulties

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8
Q

What is the Laffer Curve and how does it relate to fiscal policy?

A

Shows the relationship between tax cuts and tax revenue-

The higher tax rate is = less revenue you will bring in, cause recession-Lower tax= more revenue bring in, more production

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9
Q

Classical economics(Hayek) vs Keynesian ( supply side v. demand side)

A
  • Keynesian immediately boosts the economy, ends depressions because it boosts demand, works historically, only the government can do this.

Hayek- through taxes, high taxes=not full employment low taxes=full employment
More of a government off economy approach

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10
Q

Progressive tax structure

A

% of taxes paid increases as income increases

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11
Q

Progressive tax structureArgument for/ against this one?

A

Taxes affect people with higher income less than they affect people with lower income

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12
Q

Proportional tax structure

A

% of taxes paid stays the same at all income levels

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13
Q

Proportional tax structureArgument for/ against this one?

A

Makes it “fair” but that % affects people with less income more than people with higher income.

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14
Q

What is the difference between Debt and Deficit

A
  • Debt is total amount of money owed throughout the years-

- deficit is per year how much money you need to borrow to cover yearly expenses

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15
Q

What do we need to compare the debt to and why?

A

We need to compare it to GDP because that tells you whether or not the debt is too high or not, and if you can repay your debt

  • if we are not making more (GDP%) THEN WE ARE TAKING ON LOANS(DEBT) we are a risky investment
  • that means our interest rates on our bonds will increase= causing our debt to increase
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16
Q

Why is having a debt a bad thing?

A

If it’s too high then people won’t want to lend money to you and if you don’t have enough income coming in, you can’t pay it back.
-when it is high politicians will not vote to increase expansionary measures if we need them

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17
Q

Who runs our monetary policy in the US?

A

Federal Reserve

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18
Q

Explain how fractional banking leads to the expansion of money.

A

-Banks loan out money, people spend it on starting a business or buying something, the bank gets that money back, they loan it out again -Your money does not sit inside bank, it gets loaned out and creates new money- but really it is the same money

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19
Q

What is the reserve requirement?

A

Banks have to keep a certain % of their money all the time and cant loan it all out to people.

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20
Q

What are the three most common ways that the Fed controls our money supply?

A

Reserve requirement Discount rateOpen market operations

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21
Q

When the Fed says they are cutting “the interest rate,” who does this rate affect? How

A

This affects everyone because banks can charge lower interest on loans they give and that means more people can afford to get loans

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22
Q

Why do banks need to borrow short term loans from each other?

A

To keep the amount of money in the bank reserve requirments the federal reserve requires them

23
Q

How does the Federal Fund Rate cause a change in the money supply?

A

It makes it cheaper for banks to borrow money from the federal reserve which allows banks to charge a lower interest rate for their loans which means more people will be able to get loans

24
Q

How does buying and selling securities control the money supply?

A

Selling bonds means that the buyers have to take money out of their bank account and buying bonds means that the sellers will put money into their bank accounts.

25
Q

What is the difference between a recession and a depression

A

Recession- 2 consecutive quarters of negative gdp growth

Depression- longer and more serve in terms of unemployment and GDP

26
Q

Why do some people have a problem with the GDP?

A

It doesn’t measure nonmarket economic activities, environmental quality/resource drain, quality of life, poverty/economic inequality

27
Q

What is not counted in the GDP?

A

Intermediate goods, used goods, underground production, financial transactions, household production, transfer payments, overseas production

28
Q

Why do we only count Final goods in the GDP?

A

so we do not double count items and artificially inflate the number

29
Q

Why do we look at the value of goods and not amount of goods?

A

So we can see how much money we’re getting not how many goods we’re making.

30
Q

What makes up GDP (4 sectors)

A

-Consumption-consumer durables, consumer nondurables, services-Investments- business, residential, and inventory investment-Government purchases- federal, state, and local but not transfer paymentsNet exports- Export-Imports

31
Q

GDP (Gross Domestic Product)

A

Total money value of all final goods and services produced in the nation in a year-used to measure the health of our economy-wants to raise each year- shows the economy is growing

32
Q

Inflation

A
  • a general, sustained increased in the price level
  • inflation alters signals buyers and sellers receive from the prices, changing the behavior in the markets.
  • encourages debt and more spending due to price increases.
  • Hyperinflation will cause an economy to collapse because the dollar will be worth nothing
33
Q

deflation

A

when money gains value

-encourages consumers to wait to spend their money= can cause recession if no one is spending money

34
Q

CPI

A
  • consumer price index-used to measure the increase of inflation in our economy
  • also used to measure the health of our economy, if CPI rises too fast= economy not healthy.
  • healthy at 2% increase yearly
35
Q

Unemployment

A

when a person who is actively searching for employment is unable to find work who is not in military, or in any institution.

36
Q

Structural unemployment

A

focuses on the structural problems within an economy and inefficiencies in labor markets.

37
Q

Frictional unemployment

A

the time period between jobs when a worker is searching for or transitioning from one job to another.

38
Q

Cyclical unemployment

A

type of unemployment that occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work.-at full employment when this is at 0

39
Q

Seasonal unemployment

A

the normal unemployment forced by season changed job markets. Ex summer jobs.

40
Q

Market failures

A

-The free market failures to allocate resources the most efficient. -The government steps in to fix the problem

41
Q

Externalities

A

-side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved

42
Q

Positive Externalities

A

-a good third person side effect. -Getting vaccinated. -government gives subsidies to encourage these demand increase

43
Q

Negative externalities

A

-third person side effect that harms others-second hand smoke-Government taxes these to limit supply

44
Q

Public Goods

A

-Nonexcludability: any product or service that is impossible to provide without it being available for many people to enjoy. Views of bridges/ lighthouses

. -Non-rivalry : any product or service that does not reduce in availability as people consume it. One person using it does not mean someone else now cannot use it as well.

45
Q

Free riders

A

-people who benefit from stuff without paying it them-
why free market will not provide some goods/services to people
-government uses taxes to pay for these goods since they would be under allocated without.

46
Q

How does inflation affect saving/ retirement accounts?

A

Inflation causes your money to be worth less. If you have been saving up money, now that money in your savings account is worth less= you lost money. In retirement accounts- you are living off that money and if inflation occurs you have no more income coming in.

47
Q

Minimum wage and how relates to inflation

A

If wage is not keeping up with inflation rate, you are making less each year then before.

48
Q

Who is not counted in the adult population for unemployment

A

-people under 16 or are in the military, not in jail or prison, not living permanently in nursing homes, and not in other “institutions.”

-Discouraged workers:
workers who are not working but not looking for work, and therefore not unemployed. They have dropped out of the labor force and are not counted as unemployed.

49
Q

How do we find the unemployment rate

A
  • number unemployed divided by the labor force x 100

- Call up and ask people if they are worker and looking

50
Q

When are we at full employment?

A

5%

51
Q

BUSINESS CYCLE: is the periodic rise and fall in economic activity. Use to measure when we will
Four phases to the cycle

A

-Expansion:
a period where GDP is growing

-Peak:
the top of the cycle where an expansion has run its course and it about to turn down

-Contraction:
GDP is falling. two consecutive quarters of falling GDP. If long enough, called depression

-Trough: the bottom of the cycle where a contraction has stopped and it about to turn up

52
Q

Four types of market failures

A

-Don’t efficiently allocation resources
Public Goods

-Competition does not exist
Monopolies

-Prices do not reflect cost of production
Externalities

-Tragedy of the commons
individual incentives for rational behavior do not lead to rational outcomes for the group.

53
Q

Tragedy of the commons

A

Goods that are available to everyone (air, oceans, lakes, public bathrooms) are often polluted since no one has the incentive to keep them clean.
Result is high spillover costs.

54
Q

How does the government make the marginal private costs/ benefits meet the marginal social costs/ benefits?

A

Use marginal analysis to decide how much goods to provide for society

Econ / Financial Literacy (5 decks)

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