Exam questions Flashcards
(14 cards)
Three quantitative instruments used in monetary policy
Cash Reserve Ratio- percentage of total deposits that are kept as reserves with the central bank. if the CRR goes up, banks have less money to lend and the money supply shrinks, if it goes goes down we have more money to lend and the money supply expands.
Open Market Operations- when the central bank buys (injecting money) or sells (pulling money) bonds in the open market.
Minimum Lending rate: the rate at which the Central bank conducts its business and trade.
Three motives for people to hold money
Precautionary- money demanded for unforeseen events like sickness
Transactionary- money demanded for day to day use and transactions like food, rent and transport.
Speculative- opportunity cost of holding assets like cars and bonds.
what two specific changes would shift the SRAS to the downward and right?
Decrease in cost of production like wages and materials like oil and improvement in technology and productivity.
Monetary policy
is how a country’s central bank controls the money supply and interest rates to keep the economy stable.
the multiplier
is the initial change in spending (like government spending or investment) leads to a greater overall change in national income
what three changes could increase the size of a multiplier
-decrease in the marginal propensity to save as if people save less and spend more, this leads to a change in multiplier
-decrease in taxes leads to more disposable income and spending leading to an increase in national income
-decrease in imports thereby less spending internationally and more money domestically
what is the marginal propensity to consume
is the proportion of extra income that a person spends rather than saves.
Four objectives of a government
Economic growth, low unemployment, favorable balance of payment and stable prices
when do we use the basic multiplier formula
when it’s a close economy with no government or taxes and imports
Transfer payments
money the government gives without any goods or services in return basically financial help
distinguish between a customs union and a common market
a customs union is a group of countries that trade freely with each other and apply the same external tariff on goods from non-members. A common market includes all the features of a customs union but also allows for the free movement of labor, capital, and services between member countries. While both promote economic integration, a common market goes further by removing more barriers to movement within the region.
what is fiscal policy induced stabilization
Fiscal policy induced stabilization is when the government uses spending and taxes on purpose to keep the economy stable and reduce booms and busts.
Types of fiscal policy
Expansionary fiscal policy is when the government increases spending or cuts taxes to stimulate the economy during a recession.
Contractionary fiscal policy is when the government reduces spending or raises taxes to cool down an overheating economy and control inflation.
name three time lags that can limit the impact of discretionary fiscal policy
- Recognition Lag is the delay between when an economic problem (like a recession or inflation) actually begins and when policymakers realize it’s happening, because it takes time to gather, analyze, and confirm the data.
- Implementation Lag
Once the problem is recognized, it can take weeks or even months for the government to debate, approve, and roll out a fiscal policy—especially if there’s political disagreement or bureaucracy slowing things down. - Impact Lag
Even after the policy is put into action, there’s still a wait before it actually affects the economy, because businesses and consumers don’t change their spending or investing habits overnight—it takes time for the effects to ripple through
