Unit 4: Macroeconomics Flashcards
Who is in control of Fiscal Policy?
Government- President and Congress
What is the goal of Fiscal policy?
Have full employment
When does the government use Contraction Fiscal policy?
When worried about inflation
Two things Fiscal Policy can do with contractionary policy
- Decrease government spending
- Increase taxes
When does the Fiscal Policy use Expansionary policy?
When economy is in recession/ depression
The Two things they can do to implement expansionary policy?
Increase spending
Cut taxes
What is the problem with Fiscal Policy?
Political factors, time lags, forecasting difficulties
What is the Laffer Curve and how does it relate to fiscal policy?
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
Classical economics(Hayek) vs Keynesian ( supply side v. demand side)
- 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
Progressive tax structure
% of taxes paid increases as income increases
Progressive tax structureArgument for/ against this one?
Taxes affect people with higher income less than they affect people with lower income
Proportional tax structure
% of taxes paid stays the same at all income levels
Proportional tax structureArgument for/ against this one?
Makes it “fair” but that % affects people with less income more than people with higher income.
What is the difference between Debt and Deficit
- 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
What do we need to compare the debt to and why?
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
Why is having a debt a bad thing?
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
Who runs our monetary policy in the US?
Federal Reserve
Explain how fractional banking leads to the expansion of money.
-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
What is the reserve requirement?
Banks have to keep a certain % of their money all the time and cant loan it all out to people.
What are the three most common ways that the Fed controls our money supply?
Reserve requirement Discount rateOpen market operations
When the Fed says they are cutting “the interest rate,” who does this rate affect? How
This affects everyone because banks can charge lower interest on loans they give and that means more people can afford to get loans
Why do banks need to borrow short term loans from each other?
To keep the amount of money in the bank reserve requirments the federal reserve requires them
How does the Federal Fund Rate cause a change in the money supply?
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
How does buying and selling securities control the money supply?
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.
What is the difference between a recession and a depression
Recession- 2 consecutive quarters of negative gdp growth
Depression- longer and more serve in terms of unemployment and GDP
Why do some people have a problem with the GDP?
It doesn’t measure nonmarket economic activities, environmental quality/resource drain, quality of life, poverty/economic inequality
What is not counted in the GDP?
Intermediate goods, used goods, underground production, financial transactions, household production, transfer payments, overseas production
Why do we only count Final goods in the GDP?
so we do not double count items and artificially inflate the number
Why do we look at the value of goods and not amount of goods?
So we can see how much money we’re getting not how many goods we’re making.
What makes up GDP (4 sectors)
-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
GDP (Gross Domestic Product)
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
Inflation
- 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
deflation
when money gains value
-encourages consumers to wait to spend their money= can cause recession if no one is spending money
CPI
- 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
Unemployment
when a person who is actively searching for employment is unable to find work who is not in military, or in any institution.
Structural unemployment
focuses on the structural problems within an economy and inefficiencies in labor markets.
Frictional unemployment
the time period between jobs when a worker is searching for or transitioning from one job to another.
Cyclical unemployment
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
Seasonal unemployment
the normal unemployment forced by season changed job markets. Ex summer jobs.
Market failures
-The free market failures to allocate resources the most efficient. -The government steps in to fix the problem
Externalities
-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
Positive Externalities
-a good third person side effect. -Getting vaccinated. -government gives subsidies to encourage these demand increase
Negative externalities
-third person side effect that harms others-second hand smoke-Government taxes these to limit supply
Public Goods
-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.
Free riders
-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.
How does inflation affect saving/ retirement accounts?
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.
Minimum wage and how relates to inflation
If wage is not keeping up with inflation rate, you are making less each year then before.
Who is not counted in the adult population for unemployment
-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.
How do we find the unemployment rate
- number unemployed divided by the labor force x 100
- Call up and ask people if they are worker and looking
When are we at full employment?
5%
BUSINESS CYCLE: is the periodic rise and fall in economic activity. Use to measure when we will
Four phases to the cycle
-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
Four types of market failures
-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.
Tragedy of the commons
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.
How does the government make the marginal private costs/ benefits meet the marginal social costs/ benefits?
Use marginal analysis to decide how much goods to provide for society
