Macro Unit 5 – Flashcards
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Discretionary fiscal policy action to reduce inflation in the short run would be to
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increase taxes or decrease govt. spending
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which of the following will most likely lead to decrease in inflationary expectations
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a decrease in the money supply
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an increase in government budget deficit is most likely to result in an increase in
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interest rates
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changes in tax rates, changes in the level of government expenditures and changes in the money supply
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they have different lag times between implementation of a policy and its effects on aggregate demand
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which of the following policies best describes a supply- side policy?
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lower taxes on research and development of new technology
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which of the following will occur if the federal government runs a budget deficit?
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the size of national debt will increase
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long run growth of an economy in a recessionary gap would most likely reccomend which combinations of monetary and fiscal policy?
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buy bonds (monetary) no change (fiscal)
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which of the following is most likely to increase the real interest rate?
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people begin to fear bank instability
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nom interest rate= fixed, to maintain the interest rate target in the face of an expansionary fiscal policy, the fed can do what?
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buy bonds on the open market
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when people have rational expectations
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a fully-announced expansionary policy will not lead to significant increase in real GDP
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rational expectations
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people use all available information, past and current, to predict future events. (fully announced nothing higher or more than expected)
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adaptive expectations
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people use past info as best predictor of future events
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automatic fiscal policy stablizers
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for a given level of government spending, they produce a deficit during a recession and a surplus during expansion
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a supply shock will
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shift phillips curve to the right
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reduces government deficit without changing aggregate demand
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an increase in taxes and an increase in the money supply
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according to the short run phillips curve, a contractionary policy will result in
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a decrease in inflation and increase in unemployment
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automatic stabilizers can do what
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cause tax revenues to decrease when GDP decreases and to increase when GDP increases
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remember long run impacts usually cause
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shifts in sras
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Disadvantages of fiscal policy
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1. lag time 2. information 3. political pressures 4. crowding out
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crowding out
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when government takes money from LFM to finance expansionary policies. cause increase in interest rates and decrease in investment
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treasury bonds are
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government debt
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when in debt
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fed sells bonds to lower bank reserves and supply of money
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to prevent crowding out (and counter contractionary policy), fed can
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buy bonds
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Supply side fiscal policy
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fiscal policy that has an effect on long run growth factors
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examples of supply side policy factors
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tax cuts for capital investment, tax policies that encourage investment/ savings in business, government spending on capital improvement
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short run phillips curve shifts with
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1 supply shock (negative moves SRPC right) and (positive moves SRPC left) and 2 change in inflationary expectations
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long run phillips curve shifts with
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change in structural unemployment and change in frictional unemployment
