Fiscal/Monetary Mix And Loanable Funds Flashcards Preview

AP Economics > Fiscal/Monetary Mix And Loanable Funds > Flashcards

Flashcards in Fiscal/Monetary Mix And Loanable Funds Deck (59):
0

What is crucial in making investment decisions

The rate of interest

1

Where are real interest rates determined

The loanable funds market

2

What is recognition lag

The time it takes to recognize the problem in the macroeconomy

3

What is implementation lag

The time that it takes to implement the policy action

4

What is impact/effect lag

Time that it takes for the policy action to have its effect on the economy

5

What is considered the inside lag

Recognition and implementation

6

What is considered the outside lag

Impact/effect lag

7

What is the recognition lag for fiscal policy and monetary policy

They are the same

8

Implementation lag of fiscal policy and monetary policy

Fiscal policy it is long for monetary policy it is short

9

What is the impact/effect lag for fiscal policy and monetary policy

Short for fiscal policy and long for monetary policy

10

What is significant about the overall lag times of both monetary and fiscal policies

They're the same which is about one year

11

What does fiscal policy have such a long implementation lag time

Because it must go through the political process

12

What must fiscal and monetary policy be

Coordinated

13

Describe the money market

It measures our desire to hold M1
Supply controlled by the
Nominal interest rate

QM1$ on x axis
Nominal interest rate on y axis
Supply for money vertical

14

What does the loanable funds market supply

Investment money

15

Describe the loanable funds market graph

Quantity of loanable funds on x axis
Real interest rates on Y axis

Downward sloping DLF
Upward sloping SLF

16

What is the supply of loanable funds

Collective savings of all people At banks

17

Why is the supply of loanable funds upward sloping

Savings increase as real rates of interest increase

18

What is the demand for loanable funds

The total demand for borrowing

19

What does the demand for loanable funds include

All private investment spending and GOVERNMENT BONDING

20

What happens to the loanable funds market as the budget deficit increases

Real rates of interest increase
This decreases private investment
Government borrowing is spilling over to the money market
This could be a problem
All borrowed money comes from the same pool of money

21

What shifts when the budget deficit increases

The original demand for loanable funds which is private shifts outward into the right as DLF2 which is private and government

22

How does the process work for the crowding out effect

Expansionary fiscal policy means an increase in borrowing
Borrowing means an increase in demand for loanable funds
This increases the real rate of interest
Which might mute some of the fiscal policy stimulus

23

What is the reality of the crowding out effect

short run impact probably not as serious as shown
Fed is able to help w/ monetary policy
Crowding out -more of long-term problem due to increase in national debt borrowing causes
Increasing real rates of interest in the long run can hurt capital investment

24

Where is government debt bought and sold

The bond market

25

What Are the government securities that the bond market includes

Bills, notes, and bonds

26

Describe the liquidity of the bills notes and bonds

Highly liquid and very secure assets

27

Why do people buy bonds

To make either interest or profits

28

Through what is the bond market-driven

By supply and demand

29

What is bond yield

The bonds interest-rate

30

What is the bond market when other markets are volatile

Bond market is a safe haven

31

How do you calculate the yield of a bond

Coupon over price times 100

32

What happens to yield as bond prices go up

Yields decrease

33

What happens to yield's as bond prices decrease

Yields increase

34

Why is there an inverse relationship between bond prices and yields

When an investor buys a bond they pay the price to earn the yield. Changing the price with the same coupon payment must change the yield

35

How is stagflation shown on the Phillips curve

It is an outward shift

36

What is the rational expectations school or the expectations in high inflation

Means people buy more now
Causes increase in demand
Causes prices to raise
People want higher wages
Supply decreases

37

What does the long-run Phillips curve look like

Just vertical

38

What does it mean the unemployment level is NAIRU

Rate where inflation doesn't accelerate

39

What should someone watch in the long run growth and economic policy

Interest rates

40

What is the short run policy and what will it affect

Change AD to change GDP

These things will have implications on the long run

41

What are the factors for long-run economic growth

Capital investment
Technological change
Interest rates
Growth in resources
Efficiency growth

Increasing factors except for interest will boost LRAS

42

Where is the first place to look for the impact of a monetary and fiscal policy

Interest rates

43

What do interest rates affect

Capital investment
higher rates reduce investment and reduce future LRAS

44

How does expansionary fiscal policy affect LRAS

It increases interest rates which negatively impacts LRAS

45

How does contractionary fiscal policy impact LRAS

It decreases interest rates which has a positive impact on LRAS

46

How does easy or expansionary monetary policy impact LRAS

It reduces interest rates and increases investment which increases LRAS

47

What can fiscal policy include to impact LRAS

Changes in business taxes or possibly savings tax cuts

48

How would business taxes impact LRAS

Lower taxes on business capital investment will increase capital and increase LRAS

49

How well savings tax cuts impact LRAS

Lower taxes on savings income should increase the supply of loanable funds which decreases interest rates which increases investment and increases LRAS

50

What was the goal of Clintonomics

To reduce the deficit and national debt

51

What was the aim of Clintonomics

Keep long-run interest rates lower in the loanable funds market

Foster more investment in capital and technology and grow productive capacity

52

How do changes in supply affect the Phillips curve

It shifts it either outward or inward

53

How do changes in demand affect the Phillips curve

Causes movement along the Phillips curve

54

In the short run combining expansionary fiscal policy with tight monetary policy will most likely cause

A rise in interest rates

55

If Congress wanted to encourage growth of productive capacity in the economy already close to full employment, what should be done

Decrease in interest rates by engaging in open-market operations and raise taxes on personal income

56

What is the maturation period Of a bill

Less than a year can be a short as two weeks

57

Maturation of a note

Between one and seven years

58

Maturation of the bond

Longer than seven years with 30 years being the longest