Economics

Front 1

counter cyclical fiscal policy

Back 1

plan deficits when economy is weak and budget surpluses when strong demand threatens inflation.

Front 2

exapansionay fiscal policy
how to implement
and effects on Ad

Back 2

increase in gov't purchases and cut taxes to stimulate economy.
in a recession
ad increases

Front 3

monetary policy

Back 3

controls interest rates and supply of money

Front 4

Fiscal policy

Back 4

refers to government policy that attempts to influence the direction of the economy through changes in government spending or taxes

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recessionary fiscal policy
how to implement
and effects on Ad

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reduces Ad by less gov't spending and increased taxes.
controls inflation time of a boom

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Crowding out

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gov't demand goes up
consumers demand goes down
aggregate demand stays the same.
(interest rates are higher) and reduces stimulus effect of expansionary policy

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Why New Classical economists believe fiscal spending is impotent

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because people will ssave their money rather than pay higher future taxes. Aggregate demand is not affected because people expect and will plan for the tax increase

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Know why proper timing of fiscal policy is important



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incorrect timing can hurt economic stability and lead to inflation and futher recession

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Automatic stabilizers

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ex unemplyment compensation, corporate profit tax, progressive income tax.
tols that increase budget deficits during a recession and increase surplus during a economic boom. and vise versa. No delays. help economy towards full employment by reducing ad

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federal budget

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is usually in deficit because of increase in defense spending and recessions

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keynesian

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during recession gov't should increase spending and will not lead to crowding out

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fact

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marginal taxes have gone down and income taxes for top 2% has gone up

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homework laffer curve

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see hw

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new classsicist

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fiscal policy has no effect on demand, interest rate, employment, or output

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new classsicist

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deficit spending will not increase aggregate demand and if there is a deficit, consumers will save money of higher taxes later

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new classsicist

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increase gov't spending will lead to crowding out

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keynesian

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deficit spending will increade agreagget demand

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keynesian

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govt spending should increase in times of recessian and decrease in times of growth.

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banks

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profit seeking instituitions(accepts deposits and makes loans)
middle man of savers and investers.
creates money by extending loans.
provides services and pays interest

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money creation

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by extending loans. if the lower % reserve, more money they can give out increasing money supply

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how fed controls money supply

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buy and sells securities
setting interest rates
controls reserve requirements
and sets all rates/regulations of banks

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diff between fed and treasury

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tres- concerned with finance of fed gov't and issues bonds to public to finance budget. doesnt determine money supply
fed doesnt issue bonds. concerned with monetary climate for economy and determines $$$supply

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money supply is vertical

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supply it is set by fed/govt. its constant and determined independtly by interest rates

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how does money supply and deman affect supply and demand in goods/services market

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increase in money supply decreases interest rates leading to higher AD since we will demand more goods

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does data suggest thats there is a relationship b/t growth of money supply and inflation?rate
how about interest rate and inflation

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association does not equal causation but there is a correlation.

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restrictive money policy influence foreign exchange

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interest rates go up
dollar appreciates
consumers will buy cheaper foreign goods rather than more expensive domestic goods

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anticipated growth in money supply

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decline in AS
nominal wages, prices, and interest rates increase. value is the same.
inflation results

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unanticipated growth in money supply

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boom phase. stimulate output and employment

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m x v = p x y

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need to know

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long run effects of rapid increase in money supply

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leads to inflation

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monetary policy and interest rates

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expansionary leads to high interest rates and inflation
restrictive leads to low inflation and low interest rates
fed can impact short term interest rates but long term is limited. there are misleading

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transmission of monetary policy

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Fed buys bonds-
increases money supply and bank reserves-
real interest rates fall-
a)increase in investment/consumption
b)depreciation of the dollar
c)increase in asset prices
- net exports rise
-increase in aggregate demand

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expanisionary money supply increases AD

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because it lowers interest rates and output and employment rise

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recessionary money supply decreases AD

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because it increases interest rates and brings output and employment down

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The three roles of the Federal Reserve

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1) control the money supply 2) Regulates 3) lender of last resort.

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The long-run effects of rapid increase in money supply

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inflation

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supply and demand of money influence

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the goods and services market.
/\ money supply = /\ output.

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What are the differences between the Fed and the Treasury?

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treasury deals with fiscal policy and prints currency
fed deals with monetary policy and controls money supply

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mis-timing of monetary policy can result in

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very negative outcomes. Just like with fiscal policy

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Supply-side economics

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manipulating supply. It does this primarily by changing the marginal tax rates. By decreasing marginal
tax rates, we increase aggregate supply.

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demand side (keynesian)

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manipulating aggreagate demand

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The Fed gets its money

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interest rates on bonds

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Fed is politically insulated

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just need to know

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restrictive fiscal policy

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raise taxes or decrease government spending = in a boom phases = reduces AD

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expansive fiscal policy

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decrase in taxes of increase governemtn spending = in a recession = increases AD

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Why do the New Classical economists think fiscal policy is impotent?

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Because people respond to incentives.
government increases spending. citizens expect higher taxes next period to pay for this increased spending. They will decrease their aggregate demand and save money instead (increase the supply of loanable funds). Thus the equilibrium output level in the goods market doesn't change, and the interest rate remains the same even though the demand for loans has increased. See powerpoint.