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MacroEcon Ch 15, 16

Swalaheen Monetary Policy and Fiscal Policy

QuestionAnswer
Monetary Policy The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy goals.
Four Main Monetary Policy Goals 1) Price Stability. 2) High Employment. 3) Stability of Financial Markets and Institutions. 4) Economic Growth.
Two most important variables that cause a shift in the Money Demand Curve 1) Real GDP 2) Price Level *This additonal buying and selling increases the demand for money as a medium of exchange, in turn shifting the money demand curve to the right.
T/F: An increase in real GDP or an increase in the price level will shift the money demand curve to the RIGHT. TRUE. *A decrease shifts to the left.
T/F: An increase in money supply will cause the equilibrium interest rate to RISE. FALSE. *The interest rate will FALL.
T/F: The Loanable funds Model is concerned with the Short-term real rate of interest, while the Money Market Model is concerned with the long-term real rate of interest. FALSE. *The loanable funds market is long-term while the money market model is concerned with short-term.
Federal Funds Rate The interest rate banks charge each other for overnight loans. *Very short term.
Expansionary Monetary Policy The Federal Reserve's decreasing interest rates to increase real GDP. *Lower interest rates cause an increase in consumption, investment, and net exports which shifts the AD curve to the right.
Contractionary Monetary Policy The Federal Reserve's increasing interest rates to reduce inflation. *Higher interest rates causes a decrease in consumption, investment, and net exports which shifts the AD curve to the left.
Taylor Rule A rule developed by John Taylor that links the Fed's target for the Federal Funds Rate to economic variables. * Federal Funds Target Rate = Current inflation rate + real equilibrium federal funds rate + ((1/2) x Inflation Gap) + ((1/2 x Output Gap).
Inflation Gap Difference between current inflation and a target rate.
Output Gap The percentage difference between real GDP and potential real GDP.
Inflation Targeting Conducting Monetary policy so as to commit the central bank to achieving a publicly announced level of inflation.
Personal Consumption Expenditures Price Index (PCE) The measure of the price level of goods from the consumption category of GDP. *Includes more goods and services than CPI, so its a broader measure of inflation.
Fiscal Policy Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. *Refer only to actions taken by the Federal Government.
Automatic Stabilizers Government spending and taxes that automatically increase or decrease along with the business cycle.
In addition to purchases there are three other categories of federal government expenditures: 1) Interest on the National Debt. 2) Grants to State and Local Governments. 3) Transfer Payments
Disposable Income The income households have available to spend after they pay their taxes.
Expansionary Fiscal Policy Involves increasing government purchases or decreasing taxes. *An increase in government purchases will increase AD directly because government purchases are a component of AD.
Contractionary Fiscal Policy Involves decreasing government purchases or increasing taxes. *Policymakers use contractionary fiscal policy to reduce increases in AD that seem likely to lead to inflation.
Multiplier Effect The series of induced increases in consumption spending that results from an initial increase in autonomous expenditures.
Crowding Out A decline in private expenditures as a result of an increase in government purchases.
Budget Deficit The situation in which the government's expenditures are greater than its tax revenue.
Budget Surplus The situation in which the government's expenditures are less than its tax revenue.
Cyclically Adjusted Budget Deficit or Surplus The deficit or surplus in the federal government's budget if the economy were at potential GDP.
Tax Wedge The difference between the pretax and posttax return to an economic activity.
Created by: KAzetapi
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