question
Money Supply Increase
answer
Interest rates fall, AD up.
question
Money Market Graph
answer
A shift in short run Phillips curve in the opposite direction. Inverse Relationship.
question
On the Phillips curve a shift in AS will result in
answer
A movement along the short run Phillips curve in the opposite direction.
question
On the Phillips curve a shift in AD will result in
answer
A curve that shows the short-run trade-off between inflation and unemployment
question
The Phillips Curve
answer
Inflation and unemployment.
question
In the long run there is no tradeoff between . . .
answer
Full employment
question
LRPC lies at . . .
answer
the average times a dollar is spent and re-spent in a year.
question
Velocity of Money
answer
(P x Y) = Nominal GDP
question
M x V = P x Y
answer
Short-run spending eventually leads to higher resource prices and inflation.
If inflation is bad enough, banks don't lend and the the economy tanks.
If inflation is bad enough, banks don't lend and the the economy tanks.
question
What happens in the short-run when the central bank increases in the money supply?
answer
Monetary policy can increase real output in the short-run.
Neutrality of Money: In the long-run an increase in money supply leads to a proportional increase in price level and therefore has no effect on real output.
Neutrality of Money: In the long-run an increase in money supply leads to a proportional increase in price level and therefore has no effect on real output.
question
Why do many economists support expansionary monetary policy?
answer
Increase in MS results in:
Increase in wages, prices and exchange rates.
Does not change employment and investment.
(In long run)
Increase in wages, prices and exchange rates.
Does not change employment and investment.
(In long run)
question
Neutrality of Money
answer
Hyperinflation is when then the prices of goods and services rise uncontrollable over a defined period of time.
Hyperinflation is typically caused by continuous expansion of the money supply to finance government budget deficits.
Hyperinflation is typically caused by continuous expansion of the money supply to finance government budget deficits.
question
Hyperinflation
answer
A Federal program that requires payments to any eligible person or unit of government. This mandatory spending must be paid (e.g. Social Security)
Growth in Entitlements mean less money to budget.
Growth in Entitlements mean less money to budget.
question
Entitlements
answer
-Demand increases
-Real interest rate increases
-Private investment decreases (QPI)
-Real interest rate increases
-Private investment decreases (QPI)
question
Assume the government increases deficit spending
What will happen to the demand for loanable funds, the real interest rate, and private domestic investment?
What will happen to the demand for loanable funds, the real interest rate, and private domestic investment?
answer
Less economic growth because investment falls. Less capital stock.
question
What is the long-run impact of higher real interest rates?
answer
Crowding Out: The adverse effect of government borrowing on interest-sensitive private sector spending.
Crowding out refers to the decrease in private investment to due increased borrowing by the government.
Crowding out refers to the decrease in private investment to due increased borrowing by the government.
question
Crowding out
answer
Not nominal GDP since in doesn't account for inflation
Not real GDP because it doesn't account for population.
Real GDP per Capita- The real GDP divided by the population.
Not real GDP because it doesn't account for population.
Real GDP per Capita- The real GDP divided by the population.
question
What do economists use to measure economic growth and standard of living?
answer
The change in real GDP per capita over time.
question
Growth Rate
answer
1. Economic System- Capitalism promotes innovation and provides incentives to improve productivity.
2. Rule of Law- Countries with solid institutions and political stability have historically had more economic growth.
3. Capital Stock- Countries that have more machines and tools are more productive.
Example#1: India has a relatively low GDP because they have a lot of labor but not very much capital.
Example#2: Japan has few natural resources but a high GDP.
4. Human Capital- Countries that have better education and training are more productive.
5. Natural Resources- In general, countries that have access to more natural resources are more productive.
2. Rule of Law- Countries with solid institutions and political stability have historically had more economic growth.
3. Capital Stock- Countries that have more machines and tools are more productive.
Example#1: India has a relatively low GDP because they have a lot of labor but not very much capital.
Example#2: Japan has few natural resources but a high GDP.
4. Human Capital- Countries that have better education and training are more productive.
5. Natural Resources- In general, countries that have access to more natural resources are more productive.
question
Why do some countries have more growth?
answer
This graph shows that an increase in the amount of inputs causes an increase in the amount of output, but not at a constant rate.
Physical capital per worker, GDP per worker
Productivity levels off because of diminishing returns
Physical capital per worker, GDP per worker
Productivity levels off because of diminishing returns
question
aggregate production function
answer
LRAS right, PPC outward
question
Investment increase cause . . .
answer
Changes in productivity (tech, human capital, education)
question
What shifts aggregate production function
answer
1. Education/training spending
-Increases human capital.
2. Infrastructure spending- public works like roads, bridges, and harbors
-Increases physical capital
3. Production/Investment incentive programs (e.g. investment tax credits)
-Increases physical capital
-These are called 'supply-side policies'
-Increases human capital.
2. Infrastructure spending- public works like roads, bridges, and harbors
-Increases physical capital
3. Production/Investment incentive programs (e.g. investment tax credits)
-Increases physical capital
-These are called 'supply-side policies'
question
What government policies most likely result in long-run economic growth?
answer
Government policies designed to increase production by reducing business taxes and/or regulations. These policies are controversial because: Providing tax breaks to businesses might disproportionately benefit the wealthy. It assumes that corporations will spend tax cuts on investment rather than payout shareholders. An example of one of these policies are investment tax credits.
question
Supply-side Fiscal Policy:
answer
These policies are controversial because:
1. Providing tax breaks to businesses might disproportionately benefit the wealthy.
2. It assumes that corporations will spend tax cuts on investment rather than payout shareholders.
An example of one of these policies are investment tax credits and corporate taxes.
1. Providing tax breaks to businesses might disproportionately benefit the wealthy.
2. It assumes that corporations will spend tax cuts on investment rather than payout shareholders.
An example of one of these policies are investment tax credits and corporate taxes.
question
Why us supply side fiscal policy controversial?
answer
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