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45 Cards in this Set
- Front
- Back
Keynes emphasized that because there is no automatic adjustment back to full employment:
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Equailibrum GDP might be less than full employment.
A recession might occur Cyclical unemployment could persist |
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Appreciate fiscal policy precription for the government to follow
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Deficit reduction when there is excess AD
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Which of the following policies will definitely increase the budget defict, while achieving greater fiscal stimulus?
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Greater government expenditure and lower taxes
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If full-employment output exceeds desired spending, greater deficit spending will result in a:
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larger inflationary gap
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In order to reduce the debt
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The government should spend less than it collects in tax revenues
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Discretionary expenditure accounts for appox
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1/5 or 20% of the federal budget
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Automatic stabilizers tend to stabilize the level of economic activity because they:
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Increase spending during recessions and reduce spending during inflationary period.
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The size of the cyclical deficit depends on:
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The inflation rate
Cyclical unemployment The expansion and contraction of macro economy |
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The crowing out effect refers to a decrease in:
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Consumption or investment as a result of an increase in government borrowing
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If the government reduces some of the national debt and as a result households have more money to spend, this can result in:
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Crowding in
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Characteristic of money
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Medium of exchange
Store of value Standard of value |
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Money is functioning as a standard of value when you
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Use it to compare two houses that are different prices
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The narrowest definition of money supply
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Currency in currulation
Transactions accounts Traveler's checks |
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Currency held by the public, balances in transactions accounts, plus balance in most savings accounts and money market mutual funds added together is:
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M2
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The different components of the money supply reflect:
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Variations in liquidity and accessi ility of assets
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One of the main functions of banks is:
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Creating money
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Banks make loans to:
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Business for new plant and equipment
Consumers for new homes and cars The government for its projects |
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If bank consumers decided as a group to pay off their loans and not takeout any new loans
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The money supply would decrease
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Why do banks try to keep their holdings low
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To maximize profits
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Monetary policy involves the use of money and credit controls to
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Shift the aggregate demand curve
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Which of the following would be true for the banking system if there were no government regulations?
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The money supply would be determined by individual banks
Depositors would bear all the risks of bank failures The money supply would be subject to abrupt changes |
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The minimum amount of reserves a bank is required to hold is:
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Reserve Requirement
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Tools available to the Fed for controlling money supply
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Reserve Requirement
Discount rate Open market operations |
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Change in the reserve requirement causes a change in
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The money multiplier
The leading capacity of the banking system Excess reserve |
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An increase in the discount rate
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Signals the Fed to restrain money growth
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Idle funds
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Portfolio decision
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The Fed buys bonds from the public, it
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Increases the flow of reserves to the banking system
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Bond
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Promise to repay borrowed funds
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Rate of return on a bond
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Yield
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Market demand for money
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Precautionary demand
Transactions demand Speculative demand |
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Equilibrium rate of interest
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The fed can change it by changing the money supply
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What should happen to the equilibrium interest rate and the corresponding rate if investment if the Fed decreases the discount rate?
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Equilibrium interest rate should decrease and equilbrium rate of investment should increase
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Sequence of events when restrictive monetary policy is implemented
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The money supply decreases, interest rate increases, investments decrease, AD drecreases.
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Equation of exchange
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MV= PQ
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Monetatists views
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A reduction in M can leave real output unaffected
The velocity of money is stable Changes in M may cause changes in P |
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Real interest rate equation
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Nominal - inflated
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Liquity trap
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An increase in the money supply does not affect interest rates
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Result of stageflation
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Decrease in AS
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An aggregate supply curve that is always vertical is most consistent with which view
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Monetarist
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The closer the economy is to capacity (full employment) the greater the risk that fiscal or monetary stimulus will cause
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An increase in the price level
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Phillips Curve
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Shows the tradeoff between unemployment and inflation rates
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Phillips curve shift factors
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An earthquake
Improving infrastructure Excessive govt regulations |
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To reduce unemployment and inflation on the Phillups curve
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AS must shift right
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Examples of Supply side policy
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Lowering marginal tax rates
Improving infrastucture Eliminating excessive OSHA regulations |
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Progressive tax system
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Higher marginal tax rate at highter invome levels
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