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183 Cards in this Set
- Front
- Back
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fiscal policy
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changes in government taxes and spending that affect the level of GDP
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reduce taxes on consumers and business
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What can the government do instead of increasing spending?
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expansionary policies
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government policy actions that lead to increases in aggregate demand, increases in governement spending or decreases in taxes
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stabilization policies
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policy taken to move the economy closer to full employment or potential output
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stabilization policies
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both expansionary and contractionary policies are examples of...
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inside lags
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the time it takes to formulate a policy
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outside lags
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the time it takes for the policy to actually work
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-it takes time to identify and recognize a problem
-once a problem has been diagnosed, it still takes time before the government can take action |
What are 2 reasons why inside lags occur
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Beginning of the Great Depression
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What is a good example of an inside lag?
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econometric models
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replicate the behavior of the economy mathematically and statistically and to assist them in developing economic forecasts, can also be used to estimate the length of outside lags
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Economists are not very accurate in forecasting what will happen in the economy
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What is a problem with lags?
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federal budget
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the document that describes what the federal government spends and how it pays for that spending, provides a framework for fiscal policy
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fiscal year basis
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What calendar does the government run its budgets on?
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Began on October 1, 2004 and ended on September 30, 2005
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Fiscal year 2005 for example began when and ended when?
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Discretionary Spending, Entitlement and mandatory spending
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What are the 3 components of the budget comprise?
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Discretionary Spending
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constitutes all the programs that Congress authorized on an annual basis that are not automatically funded by prior laws
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defense spending and all nondefense domestic spending
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What type of spending does Discretionary spending include?
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contractionary policies
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government policy actions that lead to decreases in aggregate demand
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decreasing government spending and increasing taxes
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What are 2 ways to implement a contractionary policy?
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Entitlement and mandatory spending
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Spending that congress has authorized by prior law, primarily providing support for individuals
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Entitlement and mandatory spending
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What is the single largest component of the federal budget?
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social security
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a federal government program to provide retirement support and a host of other benefits
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medicare
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a federal government health program for the elderly
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medicaid
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a federal and state government health program for the poor
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Social security, medicare, medicaid
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What are 3 entitlement programs?
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net interest
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interest that the government pays to the public on the government debt held by the public
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US Treasury Bonds, bills and other debt such as US savings bonds
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What are some examples of net interest?
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entitlements and mandatory spending
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As the population grows what are the fastest growing component of the federal budget?
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taxes
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How does the federal government receives its revenue levied on both individuals and businesses?
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individual income tax
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the single largest component of federal revenue
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individual income tax
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What is it when the government witholds a portion of worker's paychecks?
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social insurance taxes
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What is the 2nd largest component of federal revenue?
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social insurance taxes
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taxes are levied on earnings to pay for social security and medicare, only paid on wages and not on income from investments
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estate and gift taxes, excise taxes and custom duties
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other taxes paid directly by individuals and families
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death tax
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what are estate and gift taxes known as?
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estate and gift taxes
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taxes levied on the estates and previous gifts of individuals when they pass away
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corporate tax
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tax levied on earnings of coporations
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federal excise taxes
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taxes levied on the sale of certain products for example gas, tires, firearms, alcohol and tobacco
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custom duties
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taxes levied on goods imported to the US such as foreign cars or wines
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Individual income tax
Social Insurance tax estate tax corporate tax |
what are the 4 main categories of federal revenues?
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supply side economics
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a school of thought that emphasizes the role that taxes play in the supply in the economy
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laffer curve
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a relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lwoer tax revenues if economic activity is severely discouragedq
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lower taxes could actually lead to higher government revenues
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what was laffer's point?
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BC taxes play in the supply of output in the economy
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Why is the laffer curve referred to as the supply side economics?
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crowding out investment
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What is the real cost of running a budget deficit?
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budget deficit
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the amount by which government spending exceeds revenues in a given year
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governemnt bond
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an IOU in which the government promises to pay back the money lend to it with interest
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borrowing from the public
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how does the government finance a budget deficit?
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budget surplus
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the amount by which government revenues exceed governemtn expenditures in a given year
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increase the likelihood of the government running a budget deficit
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What is the result when government spending is higher and lower tax collections?
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automatic stabilizers
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taxes and transfer payments taht stablize GDP without requiring policy makes to take explicit action
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John F Kennedy
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was a forceful advocate of active fiscal policy, modern fiscal policy came to be accepted
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permanent income
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an estimate of a households long run average level income
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Ronald Reagan
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Who was a supply side president?
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Improving economic incentives and increasing the supply of output
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What was Reagan's motive for cutting taxes in 1981?
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increse aggregate demand
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increases in government spending or decreases in taxes will....
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decrease aggregate demand
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decreases in goverment spending or increases in taxes will...
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investment
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an action that creates a cost today but provides benefits in the future
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accelerator theory
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the theory of investment that says that current investment spending depends positively on the expected future of real GDP
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John Maynard Keynes
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said that sharp swings in optimism and pessimism related to investment spending were often irrational, reflecting, perhaps, our most basic, primal instincts, referred to them as "animal spirits"
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procyclical
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moving in the same direction as real GDP
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procyclical
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During booms, investment spending rose sharply. In other words, investment spending is highly ___________; it increases during booms and falls during recessions.
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multiplier accelerator model
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a model in which a downturn in real GDP leads to a sharp fall in investment, which triggers further reductions in GDP through the multiplier
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Paul Samuelson
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Nobel laureate __________ described this phenomenon of investment volatility by developing the multiplier accelerator model
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present value
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the maximum amount a person is willing to pay today to receive a payment in the future
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present value equation
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k
___ (l + i)t |
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decreases; increases
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The present value of a given payment in the future __________ as the interest rate ____________.
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value today; maximum; today
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The present value _______ of a given payment in the future is the __________ amount a person is willing to pay _______ for that payment.
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opportunity cost; increases; falls; less
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As the interest rate increases, the _____________ of your funds also ____________, so the present value of a given payment in the future ________. In other words, you need _________ money today to get to your money goal.
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decreases; rises; more
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As the interest rate decreases, the opportunity cost of your funds also _________, so the present value of a given payment in the future ______. In other words, you need ________ money today to get to your money goal
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nominal interest rate
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interest rates quoted in the market
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real interest rate
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the nominal interest rate minus the inflation rate
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expected real interest rate
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the nominal interest rate minus the expected inflation rate
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Corporations
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Who are less likely to pay back loans? Corporations or the US government
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neoclassical theory of investment
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a theory of investment that says both real interest rates and taxes are important determinants of investment
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retained earnings
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corporate earnings that are not paid out as dividends to its owners
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corporate bonds
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a bond sold by a corporation to the public in order to borrow money
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Q theory of investment
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the theory of investment that links investment spending to stock prices
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high investment
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High stock prices lead to....
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real interest rate; nominal interest rate
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The _________ equals the __________ minus inflation.
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Alan Greenspan
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Who said investors and firms acted with "irrational exuberance"?
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Because although the economy had performed very well in the late 1990s, it could not grow at those rates forever?
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Why did Greenspan say that the investors and firms acted with irrational exuberance?
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liquid
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easily convertible into money on short notice, in case of financial emergency
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risk takers
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Unlike households, firms and business managers are typically_______.
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financial intermediaries
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organizations that receive funds from savers and channel them to investors
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bank run
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panikcy investors simultaneously to withdraw their funds from a bank they believe may fail
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No bank profitable or unprofitable can survive a run because not all deposits are kept on hand.
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Can any bank survive a bank run? Why or why not?
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deposit insurance
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federal government insurance on deposits in banks and savings and loans
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$100,000
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Hoe much deposit insurance gurantees the government will reimburse depositors?
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auction prices
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prices that adjust on nearly a daily basis, prices for fish, vegetables, other food products, very flexible, and adjust rapidly
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sticky prices
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prices that adjust slowly, adjust slowly to changes in demand
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sticky prices
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slowly adjusting prices
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wages
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What for most firms is the biggest cost of doing business?
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overall costs will be sticky too.
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If wages are sticky...
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short run in macro
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the period of time in which prices do change or do not change very much
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Together aggregate supply and aggregate demand curves
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form an economic model that will enable us to study how output and prices are determined in both the short run and long run
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aggregate demand curve
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a curve that shows the relationship between the level of prices and the quantity of real GDP demanded
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aggregate demand
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total demand for goods and services in an entire economy
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consumption spending, investment spending, government purchases, net exports
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What are the components on the demand curve?
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wealth effect
interest rate effect international trade effect |
Why the aggregate demand curve slopes downward, is affected 3 different ways....
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wealth effect
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the increase in spending that occurs because the real value of money increases when the price level falls
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interest rate effect
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with lower _____________ both consumers and firms will find it cheaper to borrow money to make purchases, as a consequence the demand for goods in the economy will increase
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international trade effect
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in an open economy a lower price level will mean that domestic goods become cheaper relative to foreign goods, so the demand for domestic goods will increase
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right
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increases in aggregate demand shift the demand curve to the...
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left
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factors that decrease aggregate demand shift the curve to the....
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change in the supply of money
changes in taxes changes in government spending all other changes in demand |
Things that shift the demand curve
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increase; right
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An _______ in the supply of money in the economy will increase aggregate demand and shift the aggregate demand curve to the __________.
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decrease;right
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A ________ in taxes will increase aggregate demand and shift the demand curve to the _______
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increase; left
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An ________ in taxes will decrease aggregate demand and shift the demand curve to the ___________
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households, firms or foreign sector will also change aggregate demand
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What are some of the other changes in demand?
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decreases in taxes
increase in government spending increase in the money supply |
factors that increase aggregate demand
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increase in taxes
decrease in government spending decrease in money supply |
factors that decrease aggregate demand
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multiplier
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the ratio of the total shift in aggregate demand to the inital shift in aggregate demand
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consumption function
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the relationship between the level of income and consumer spending
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autonomous consumption spending
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the part of consumption spending that does not depend on income
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marginal propensity to consume
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the fraction of additional income that is spent
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marginal propensity to save
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the fraction of additional income that is saved
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aggregate supply curve
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a curve that shows the relationship between the level prices and the quantity of output supplied
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long run aggregate supply curve
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a vertical aggregate supply curve that represents the idea that in the long run, output is determined solely by the factors of production
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full employment
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The level of ____________ output determines the long run aggregate supply curve.
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short run aggregate supply curve
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a relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand
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Because in the short run firms are assumed to supply all the output demanded, with small changes in prices.
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Why is short run supply curve relatively flat?
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Supply adjusts to demand in the short run. If demand is very high and the economy is overheated output may exceed fullemployment output.
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What happens to the unemployment level in the short run if aggregate demand shifts out?
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supply shocks
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external events that shift the aggregate supply curve
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stagflation
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a decrease in real output with increasing prices
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High oil prices in the 70s
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What are some examples of supply shock?
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Because of rising prices and falling output. Firms will supply their output only at a higher price.
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Why does stagflation develop?
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money
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any items that are regularly used in economic transactions or exchanges and accepted by buyers and sellers
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medium of exchange
unit of account store of value |
What are the 3 properties of money?
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medium of exchange
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any item that buyers give to sellers when they purchase goods and services
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barter
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the exchange for one good or service for another
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double coincidence of wants
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the problem in a system of barter that one person may not have what the other 1 desires
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voluntary exchange
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Which key principles of economics is relavent to money?
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unit of account
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a standard of unit in which prices can be stated and the value of goods and services can be compared
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store of value
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the property of money that it preserves value until it is used in an exchange
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inflation
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As long as ________ is low and you dont hold the money for a long time, the loss in its purchasing power wont be a big problem.
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commodity money
gold standard fiat money |
What are the 3 different types of monetary systems?
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commodity money
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a monetary system in which the actual money is a commodity such as gold or silver
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gold standard
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a monetary system in which gold backs up paper money
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fiat money
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a monetary system in which money has no intrinsic value but is backed by the government
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Government controls the value of fiat money by controlling its supply in the economy
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What gives money value under the fiat system?
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M1
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most basic measure of money in the US, it is the sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler's checks
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demand deposits
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2nd component is deposits in checking accounts
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currency held outside of bank vaults
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first part of M1
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checkable deposits
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3rd part of M1
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M2
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M1 plus other assests, including deposits in savings and loans accounts and money market mutual funds
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100,000
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Time deposits have less than how much money?
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money market mutual funds
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came into existence in the 70s, park their assets in these funds anticipating they will move the funds into riskier, higher earning stock market investments
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Because you are borrowing the money from the bank and must begin to pay back the loan, it is not a medium of exchange, unit of account, or store of value.
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Why are credit cards not considered in the money supply?
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Because it is exactly the same as writing a check, the money supply still consits of the balances in checking accounts plus currency by the public.
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Why is a debit card not an independent source of money?
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balance sheet
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an account statement for a bank that shows the sources of its funds (liabilities) as well as the uses of its funds (assets)
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liabilities
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the sources of funds for a bank, including deposits and owners equity
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assets
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the uses of the funds of a bank, including loans and reserves, generate income for the bank
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owner's equity
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the funds provided to the bank by its owners
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Because borrowers must pay interest on the loans the bank collects.
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Why are loans examples of assets?
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reserves
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the portion of bank's deposits set aside in either vault cash or as deposits at the Federal Reserve
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required reserves
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the specific fraction of their deposits that banks are required by law to hold as reserves
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excess reserves
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any additonal reserves that a bank holds above beyond what is required reserves
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reserve ratio
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the ratio of reserves to deposit
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10%
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How much do banks hold?
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money mulitipler
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the ratio of the increase in total checking account deposits to an initial cash deposit
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2 and 3
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the money multiplier for the US is between...
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Our formula assumed that all loans made their way directly into checking accounts.
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What is the reason for a smaller money multiplier?
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central bank
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a banker's bank; an official bank that controls the supply of money in a country
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lender of last resort
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when banks need to borrow money during a finanicial crisis, they can turn to the central bank as __________ for these funds
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congress
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Who created the Federal Reserve System?
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Supplies currency to the economy
provides a system of check collection and clearing conducts monetary policy lender of last resort |
What are the key function of the Federal Reserve?
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monetary policy
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the range of actions by the Federal Reserve to influence the level of GDP or inflation
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Federal Reserve Bank
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one of the 12 regional banks that are an official part of the Federal Reserve System
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Board of Governors of the Federal Reserve
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the 7 person governing body of the Federal Reserve in Washington
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14
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How many years do the members of the Board of Governors of the Federal Reserve serve?
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4
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How many years does the chairperson of the board of governors serve?
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Benjamin Bernanke
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Whos is the current chairman of the Federal Reserve?
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Federal Open Market Committee
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The group that decides on monetary policy: it consists of the 7 members of the Board of Governors plus 5 of the 12 regional bank presidents on a rotating basis
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Paul Volcker
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Chairman from 79 to 87
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Alan Greenspan
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chairman who served from 87 to 2006
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increase; left
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An ______ in taxes will decrease aggregate demand and shift the aggregate demand curve to the _________
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expansionary policies
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increasing government spending and cutting takes are examples of...
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contractionary policies
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decreasing government spending and increasing taxes are examples of...
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supply of factors of production
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The long run aggregate supply curve is determined by what?
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output is determined by demand
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short run aggregate suppy curve is determined by what?
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changes in demand will only affect prices, not the level of output
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the aggregate with thelong run aggregate supply curve indicates...
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because it does not depend on the price level
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Why is the long run aggregate supply curve vertical?
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