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AP MACRO ECON > Unit 5: Inflation and Unemployment > Flashcards

Unit 5: Inflation and Unemployment Flashcards

1
Q

The Budget Balance (DEF.)

A

The difference between the gov.’s tax revenue and its spending, both on goods and services and on gov. transfers, in a given year

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2
Q

Budget Balance Equation

A

Gov. Savings= tax revenues- gov. purchase- value of gov transfers

Sgov=T-G-TR

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3
Q

A budget surplus is…

A

A positive budget balance

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4
Q

A budget deficit is…

A

A negative balance

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5
Q

Budget Deficit almost always rises when…

A

Unemployment rate rises

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6
Q

Budget Deficit almost always falls when…

A

Unemployment falls

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7
Q

Expansionary Fiscal Policies make…

A

Budget surplus smaller or deficit bigger

Ex. Gov purchases of goods/services, increase gov transfers, decrease taxes

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8
Q

Contractionary Fiscal Policies…

A

Increase budget balance making surplus increase and deficit decrease
Ex. Decrease in gov purchases, decrease in gov transfers, and increase taxes

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9
Q

2 Misleading things about Fiscal Policy

A
  1. 2 difference changes in fiscal policy that have equal effects on the budget balance may have unequal effects on economy
  2. Changes in budget balance are themselves the result, not the cause, of fluctuations in the econ. (Sometimes)
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10
Q

Relationship between budget balance and business cycle

A

Recession- deficit

Expansion- surplus

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11
Q

Cyclically Adjusted Budget Balance

A

An estimate of what the budget balance would be if real GDP were exactly equal to potential output

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12
Q

Should Budget be Balanced?

A

NO!

  • gov should only balance budget on average, it should be allowed to run deficits in bad years, offset by surpluses in good years.
  • shouldn’t be forced to run balanced because would undermine role of taxes and transfers as autostabalizers
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13
Q

Gov. Debt

A

The accusation of past budget deficits, minus past budget surpluses

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14
Q

What does the gov do when it runs budget deficit

A

Most always borrows extra funds

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15
Q

Fiscal Year

A

Runs from Oct 1 to Sept 1 and is labeled according to the calendar in which it ends

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16
Q

Public Debt

A

Gov. Debt held by indiv. And institutions outside the gov

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17
Q

2 reasons to be concerned when a gov runs persistent budget deficits

A
  1. When the econ is at potential out put and gov borrows finds in the financial markets, its competing with firms that plan to borrow finds for investment therefore, the gov’s borrowing may crowd out private invent. Spending- increase interest rates and redice Econ’s long run rate of growth
  2. Today’s deficits place financial pressure on future budgets
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18
Q

Debt- GDP Ratio (DEF.)

A

The gov debt as a % of GDP

- good indicator or potential taxes the gov can collect

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19
Q

Implicit Liabilities

A

Spending promise and by gov that are effectively a debt despite the fact that they’re not included in the usual debt statistics

  • largest is medicare and social security
  • 3rd largest- Medicaid
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20
Q

The Federal Reserve can decrease interest rate by…

A

Increasing money supply

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21
Q

The Federal Reserve can increase interest rate by…

A

Decreasing money supply

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22
Q

Open Market

A

Purchase/sale of treasury bills

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23
Q

An open market purchase…

A

Drives interest rate down

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24
Q

An open market purchase…

A

Drives interest rate up

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25
Q

Expansionary monetary policy

A

Monetary Policy that increases aggregate demand

  • increases money supply- decreases interest rate- increases invest. Spending- increases consumer spending- increases AD- shifts to right
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26
Q

Contractionary Monetary Policy

A

Monetary policy that decreases aggregate demand

  • decreases money supply- raises interest rates- lowers investment- decreases consumer spending- decreases AD- shift to left
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27
Q

2 goals of policy makers

A

Ensure price stability and fight recessions

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28
Q

Taylor Rule for Monetary Policy

A

Rule for setting the fed finds rate that takes into account both the inflation rate and output gap
- take into account inflation and business cycle

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29
Q

Fed Funds Rate=

A

1+(1.5Xinflation rate)+(.5Xoutput gap)

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30
Q

Monetary Policy is preferred because…

A

Fed moves faster than congress

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31
Q

Inflation Targeting

A

Occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target

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32
Q

Main difference between John Taylor’s rule and inflation target

A

Taylor rule adjust monetary policy in response to past inflation, but inflation target is based on forecasts of inflation

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33
Q

Pros of Inflation targeting

A
  1. Reduces econ uncertainty because public knows objective of inf. Targeting
  2. Success can be judged by seeing how closely actual inflation rates have match inf. Target.
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34
Q

Cons of Inflation targeting

A
  • too constrictive
35
Q

In the long run changes in the quantity of money…

A

Affect the aggregate price level but doesn’t change real aggregate output or the interest rate

36
Q

An increase in money supply decreases interest rate and increases aggregate demand…

A

But the eventual rise in nominal wages leads to a fall in in short-run aggregate supply and aggregate output decreases back to potential output.

37
Q

Only long-run Effect of an increase in money supply is an…

A

Increase in aggregate price level from P1 to P3

38
Q

Monetary Neutrality

A

Changes in the only supply have no real effects on the economy
- MONEY IS NEUTRAL IN THE LONG RUN

39
Q

An increase in money supply interest rate in short run…

A

In long run increases prices leads to increase in money demand and increase interest rate to original level

40
Q

In the long run, changes in the quantity of money affect what?

A

Aggregate Price Level

41
Q

An increase in money supply leads to what in the short run?

A

Increase in aggregate demand

42
Q

A 10% decrease in money supply will change the aggregate price level in the long run by…

A

10%

43
Q

Monetary neutrality mean as that in the long run changes in money supply…

A

Have no real effect on econ

44
Q

A graph of percent increase in the money supply and average annual increase in the price level for various countries provides evidence that…

A

Money in neutral in the long run

45
Q

Classical Model of the Price Level

A

The real quantity of money is always at its long-run equilibrium level

46
Q

Inflation Tax

A

A reduction in the value of money held by the public caused by inflation

47
Q

Cost-Push Inflation

A

Inflation that’s caused by a significant increase in the price of an input with economy wide importance

48
Q

Demand-Pull Inflation

A

Inflation that is caused by an increase in aggregate demand

49
Q

The real quantity of money is…

A

Equal to M/P and the money supply adjusted for inflation

50
Q

In the classical model of the price level

A

Both the short and long-run aggregate supply curves are vertical

51
Q

The classical model of the prive level is most applicable in….

A

Periods of high inflation

52
Q

An inflation tax is…

A

The result of a decrease in the value of money held by the public

53
Q

Revenue generated by the gov’s right to print money is known as…

A

Seigniorage

54
Q

Short Run Phillips Curve (DEF)

A

The negative short-run relationship between the unemployment rate and the interest
- lower unemployment tends to lead to higher inflation and vise versa

55
Q

When unemployment rate is low interest rate is

A

High

56
Q

When unemployment rate is high interest rate is

A

Low

57
Q

Long Run Phillips Curve

A

Shows relationship between unemploy. And inflation after expectation of inflation have had time to adjust to experience

58
Q

Non Accelerating Inflation Rate of Unemployment (NAIRU)

A

The unemployment rate at which inflation doesn’t change over time

59
Q

Debt Deflation

A

The reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation

60
Q

Expected deflation affects…

A

Nominal interest rate

61
Q

Zero bound (DEF)

A

On the nominal interest rate: it can’t go below zero

62
Q

Liquidity Trap

A

A situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound

63
Q

The long Run Phillips Curve is…

A

Verticle

64
Q

The short Run Phillips curve shows a —— relationship between ——-

A

Negative

Unemployment and interest

65
Q

An increase in expected inflation will…

A

Shift the short run Phillip curve upward

66
Q

Bringing down inflation that has become embedded expectation is called…

A

Deflation

67
Q

Debt deflation is…

A

The reduction in aggregate demand arriving from the real burden of outstanding debt caused by deflation

68
Q

According to classical model of price level prices are…

A

Flexible, making the aggregate supply curve vertical even in the short run

69
Q

Great Dep. showed economists cant ignore…

A

Short run

70
Q

Keynes car Comparison

A

Getting econ running required only modest repair not complete overhaul

71
Q

Keynesian economics…

A

Focuses on the ability of shifts in aggregate demand to influence aggregate output in short run

72
Q

Macroeconomic Policy Activism

A

The use of monetary and fiscal policy to smooth out the business cycle

73
Q

Liquidity Trap

A

Situation in which monetary policy is ineffective because the interest rate is down against the 0 bound

74
Q

A sale of bonds by Fed…

A

Raises interest rates and redices money supply

75
Q

A reduction in interest rates due to an increase in the money supply will shift…

A

Aggregate demand to the right

76
Q

According to the classical model of price level, an increase in the money supply will create…

A

Inflation with no long-Run increase in real GDP

77
Q

Government’s right to print money to finance deficits is referred to as….

A

Seigniorage

78
Q

Economy is recessionary gap should do what?

A

Expansionary Fiscal Policy

- cut taxes, increase transfers, increase gov spending

79
Q

Economy in inflationary gap should do what?

A

Contractionary Fiscal policy

- increase taxes, decrease transfers, decrease gov spending

80
Q

Fed is now chaired by…

A

Jerome Powel

81
Q

Adam Smith- Self-Interest

A

Market is driven by self-interest, people’s impulse to fulfill their own needs
- society is better because of it

82
Q

Invisible Hand

A

Acting in self-interest

- Adam smith

83
Q

Says Law

A

Supply creates its own demand

AP MACRO ECON (5 decks)

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