Midterm 3

Question 1

what causes inflation in the long run

Answer 1

the quantity of money grows faster than the potential GDP

Question 2

what are the two sources of inflation

Answer 2

Demand Pull
Cost Push

Question 3

what is demand pull inflation

Answer 3

inflation that starts because aggregate demand increases

Question 4

what is cost push inflation

Answer 4

inflation that starts with an increase in costs

Question 5

what are the sources of increased costs leading to cost push inflation

Answer 5

an increase in the money wage rate
an increase in the money price of raw materials

Question 6

what is stagflation

Answer 6

the combination of rising price levels and decreasing real GDP

Question 7

what is a rational expectation forecast

Answer 7

an inflation forecast based on all relevant information

Question 8

what is deflation

Answer 8

when an economy has persistently decreasing price levels

Question 9

what causes deflation

Answer 9

aggregate demand increases at a persistently slower rate than aggregate supply

Question 10

what are the consequences of deflation

Answer 10

unanticipated deflation redistributes income and wealth, lowers real GDP and employment, and diverts resources from production

Question 11

how can deflation be ended

Answer 11

by increasing the growth rate of money
make the money growth rate exceed the growth rate of real GDP minus the rate of velocity change

Question 12

what is the Philips curve

Answer 12

a curve that shows the relationship between the inflation rate and the unemployment rate

Question 13

what is the short run Philips curve

Answer 13

a philips curve where the expected inflation rate and the natural unemployment rate are held constant

Question 14

what is the long run Philips curve

Answer 14

the Philips curve when the actual inflation rate equals the expected inflation rate

Question 15

what is the federal budget

Answer 15

the annual statement of the federal Govs outlays and revenues

Question 16

what are the two purposes of the federal budget

Answer 16

finance the activities of the federal government
achieve macroeconomic objectives

Question 17

what is fiscal policy

Answer 17

the use of the federal budget to achieve macroeconomic objectives such as full employment, sustained economic growth, and price level stability

Question 18

what is the budget balance

Answer 18

federal revenues minus outlays
can be surplus, deficit, or balanced

Question 19

what is government debt

Answer 19

the total amount that the government is borrowing

Question 20

what are the supply side effects of fiscal policy

Answer 20

the effects on employment, potential GDP, and aggregate supply

Question 21

what is fiscal stimulus

Answer 21

the use of fiscal policy to increase production and employment

Question 22

what is automatic fiscal policy

Answer 22

policy action triggered by the state of the economy without government action

Question 23

what is discretionary fiscal policy

Answer 23

policy action that is initiated by an act of parliament

Question 24

what are the two items in the government budget that change automatically

Answer 24

tax revenues
outlays

Question 25

what does automatic stimulus do in a recession

Answer 25

tax revenues decrease and outlays increase automatically stimulating the economy to shrink the recessionary gap

Question 26

what does automatic stimulus do in a boom

Answer 26

tax revenues increase and outlays decrease the the budget automatically retains the economy to shrink the inflationary gap

Question 27

what is the structural surplus or deficit

Answer 27

the budget balance that would occur if the economy were at full employment and real GDP were equal to potential GDP

Question 28

what is the cyclical surplus or deficit

Answer 28

the actual surplus or deficit minus the structural surplus or deficit the deficit or surplus that occurs purely because real GDP does not equal potential GDP

Question 29

what does discretionary fiscal stimulus focus on

Answer 29

effecting aggregate demand

Question 30

what are the two main fiscal multipliers

Answer 30

government expenditure multiplier tax multiplier

Question 31

what is the government expenditure multiplier

Answer 31

the quantity effect of a change in government expenditure on real GDP

Question 32

what is the tax multiplier

Answer 32

the quantity effect a change in taxes has on aggregate demand

Question 33

what are the three time lags hampering fiscal policy

Answer 33

recognition lag law-making lag impact lag

Question 34

what is the objective of the BOC and monetary policy

Answer 34

control the quant of money and interest rates to avoid inflation and when possible prevent excessive swings in real GDP growth and unemployment

Question 35

what is inflation rate targeting

Answer 35

targeting a certain change in the total CPI

Question 36

what are the two main benefits of adopting an inflation control target

Answer 36

fewer surprises and mistakes on the part of savers and investors anchors expectations about future inflation

Question 37

what are critics fears about inflation control targeting

Answer 37

by focusing on inflation, the bank might permit the unemployment rate to rise or real GDP to slow the bank might permit the value of the dollar to rise not eh forex market and make exports suffer

Question 38

what are the three possible monetary policy instruments

Answer 38

the quantity of money(monetary base) the exchange rate the short term interest rate

Question 39

what is the BOC's choice of intruments

Answer 39

the short term interest rate, specifically the overnight loans rate

Question 40

what is the overnight loans rate

Answer 40

the interest rate on overnight loans that large banks make to eachother

Question 41

what tools does the BOC use to hit the target overnight rate

Answer 41

the operating band open market operations

Question 42

what is the operating band

Answer 42

the target overnight loans rate +- 0.25 percentage points

Question 43

what is the bank rate

Answer 43

the interest rate the bank charges big banks on loans set 0.25 bps above the target overnight rate

Question 44

what is the settlement balances rate

Answer 44

the interest rate the BOC pays on reserves set 0.25 bps below the target overnight rate