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AP MACRO ECON > Unit 5: Inflation and Unemployment > Flashcards

Unit 5: Inflation and Unemployment Flashcards

1
Q

The Budget Balance (DEF.)

A

The difference between the gov.’s tax revenue and its spending, both on goods and services and on gov. transfers, in a given year

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2
Q

Budget Balance Equation

A

Gov. Savings= tax revenues- gov. purchase- value of gov transfers

Sgov=T-G-TR

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3
Q

A budget surplus is…

A

A positive budget balance

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4
Q

A budget deficit is…

A

A negative balance

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5
Q

Budget Deficit almost always rises when…

A

Unemployment rate rises

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6
Q

Budget Deficit almost always falls when…

A

Unemployment falls

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7
Q

Expansionary Fiscal Policies make…

A

Budget surplus smaller or deficit bigger

Ex. Gov purchases of goods/services, increase gov transfers, decrease taxes

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8
Q

Contractionary Fiscal Policies…

A

Increase budget balance making surplus increase and deficit decrease
Ex. Decrease in gov purchases, decrease in gov transfers, and increase taxes

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9
Q

2 Misleading things about Fiscal Policy

A
  1. 2 difference changes in fiscal policy that have equal effects on the budget balance may have unequal effects on economy
  2. Changes in budget balance are themselves the result, not the cause, of fluctuations in the econ. (Sometimes)
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10
Q

Relationship between budget balance and business cycle

A

Recession- deficit

Expansion- surplus

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11
Q

Cyclically Adjusted Budget Balance

A

An estimate of what the budget balance would be if real GDP were exactly equal to potential output

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12
Q

Should Budget be Balanced?

A

NO!

  • gov should only balance budget on average, it should be allowed to run deficits in bad years, offset by surpluses in good years.
  • shouldn’t be forced to run balanced because would undermine role of taxes and transfers as autostabalizers
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13
Q

Gov. Debt

A

The accusation of past budget deficits, minus past budget surpluses

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14
Q

What does the gov do when it runs budget deficit

A

Most always borrows extra funds

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15
Q

Fiscal Year

A

Runs from Oct 1 to Sept 1 and is labeled according to the calendar in which it ends

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16
Q

Public Debt

A

Gov. Debt held by indiv. And institutions outside the gov

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17
Q

2 reasons to be concerned when a gov runs persistent budget deficits

A
  1. When the econ is at potential out put and gov borrows finds in the financial markets, its competing with firms that plan to borrow finds for investment therefore, the gov’s borrowing may crowd out private invent. Spending- increase interest rates and redice Econ’s long run rate of growth
  2. Today’s deficits place financial pressure on future budgets
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18
Q

Debt- GDP Ratio (DEF.)

A

The gov debt as a % of GDP

- good indicator or potential taxes the gov can collect

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19
Q

Implicit Liabilities

A

Spending promise and by gov that are effectively a debt despite the fact that they’re not included in the usual debt statistics

  • largest is medicare and social security
  • 3rd largest- Medicaid
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20
Q

The Federal Reserve can decrease interest rate by…

A

Increasing money supply

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21
Q

The Federal Reserve can increase interest rate by…

A

Decreasing money supply

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22
Q

Open Market

A

Purchase/sale of treasury bills

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23
Q

An open market purchase…

A

Drives interest rate down

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24
Q

An open market purchase…

A

Drives interest rate up

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25
Expansionary monetary policy
Monetary Policy that increases aggregate demand - increases money supply- decreases interest rate- increases invest. Spending- increases consumer spending- increases AD- shifts to right
26
Contractionary Monetary Policy
Monetary policy that decreases aggregate demand - decreases money supply- raises interest rates- lowers investment- decreases consumer spending- decreases AD- shift to left
27
2 goals of policy makers
Ensure price stability and fight recessions
28
Taylor Rule for Monetary Policy
Rule for setting the fed finds rate that takes into account both the inflation rate and output gap - take into account inflation and business cycle
29
Fed Funds Rate=
1+(1.5Xinflation rate)+(.5Xoutput gap)
30
Monetary Policy is preferred because...
Fed moves faster than congress
31
Inflation Targeting
Occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target
32
Main difference between John Taylor’s rule and inflation target
Taylor rule adjust monetary policy in response to past inflation, but inflation target is based on forecasts of inflation
33
Pros of Inflation targeting
1. Reduces econ uncertainty because public knows objective of inf. Targeting 2. Success can be judged by seeing how closely actual inflation rates have match inf. Target.
34
Cons of Inflation targeting
- too constrictive
35
In the long run changes in the quantity of money...
Affect the aggregate price level but doesn’t change real aggregate output or the interest rate
36
An increase in money supply decreases interest rate and increases aggregate demand...
But the eventual rise in nominal wages leads to a fall in in short-run aggregate supply and aggregate output decreases back to potential output.
37
Only long-run Effect of an increase in money supply is an...
Increase in aggregate price level from P1 to P3
38
Monetary Neutrality
Changes in the only supply have no real effects on the economy - MONEY IS NEUTRAL IN THE LONG RUN
39
An increase in money supply interest rate in short run...
In long run increases prices leads to increase in money demand and increase interest rate to original level
40
In the long run, changes in the quantity of money affect what?
Aggregate Price Level
41
An increase in money supply leads to what in the short run?
Increase in aggregate demand
42
A 10% decrease in money supply will change the aggregate price level in the long run by...
10%
43
Monetary neutrality mean as that in the long run changes in money supply...
Have no real effect on econ
44
A graph of percent increase in the money supply and average annual increase in the price level for various countries provides evidence that...
Money in neutral in the long run
45
Classical Model of the Price Level
The real quantity of money is always at its long-run equilibrium level
46
Inflation Tax
A reduction in the value of money held by the public caused by inflation
47
Cost-Push Inflation
Inflation that’s caused by a significant increase in the price of an input with economy wide importance
48
Demand-Pull Inflation
Inflation that is caused by an increase in aggregate demand
49
The real quantity of money is...
Equal to M/P and the money supply adjusted for inflation
50
In the classical model of the price level
Both the short and long-run aggregate supply curves are vertical
51
The classical model of the prive level is most applicable in....
Periods of high inflation
52
An inflation tax is...
The result of a decrease in the value of money held by the public
53
Revenue generated by the gov’s right to print money is known as...
Seigniorage
54
Short Run Phillips Curve (DEF)
The negative short-run relationship between the unemployment rate and the interest - lower unemployment tends to lead to higher inflation and vise versa
55
When unemployment rate is low interest rate is
High
56
When unemployment rate is high interest rate is
Low
57
Long Run Phillips Curve
Shows relationship between unemploy. And inflation after expectation of inflation have had time to adjust to experience
58
Non Accelerating Inflation Rate of Unemployment (NAIRU)
The unemployment rate at which inflation doesn’t change over time
59
Debt Deflation
The reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation
60
Expected deflation affects...
Nominal interest rate
61
Zero bound (DEF)
On the nominal interest rate: it can’t go below zero
62
Liquidity Trap
A situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound
63
The long Run Phillips Curve is...
Verticle
64
The short Run Phillips curve shows a —— relationship between ——-
Negative | Unemployment and interest
65
An increase in expected inflation will...
Shift the short run Phillip curve upward
66
Bringing down inflation that has become embedded expectation is called...
Deflation
67
Debt deflation is...
The reduction in aggregate demand arriving from the real burden of outstanding debt caused by deflation
68
According to classical model of price level prices are...
Flexible, making the aggregate supply curve vertical even in the short run
69
Great Dep. showed economists cant ignore...
Short run
70
Keynes car Comparison
Getting econ running required only modest repair not complete overhaul
71
Keynesian economics...
Focuses on the ability of shifts in aggregate demand to influence aggregate output in short run
72
Macroeconomic Policy Activism
The use of monetary and fiscal policy to smooth out the business cycle
73
Liquidity Trap
Situation in which monetary policy is ineffective because the interest rate is down against the 0 bound
74
A sale of bonds by Fed...
Raises interest rates and redices money supply
75
A reduction in interest rates due to an increase in the money supply will shift...
Aggregate demand to the right
76
According to the classical model of price level, an increase in the money supply will create...
Inflation with no long-Run increase in real GDP
77
Government’s right to print money to finance deficits is referred to as....
Seigniorage
78
Economy is recessionary gap should do what?
Expansionary Fiscal Policy | - cut taxes, increase transfers, increase gov spending
79
Economy in inflationary gap should do what?
Contractionary Fiscal policy | - increase taxes, decrease transfers, decrease gov spending
80
Fed is now chaired by...
Jerome Powel
81
Adam Smith- Self-Interest
Market is driven by self-interest, people’s impulse to fulfill their own needs - society is better because of it
82
Invisible Hand
Acting in self-interest | - Adam smith
83
Says Law
Supply creates its own demand

AP MACRO ECON (5 decks)

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