putting fiscal and monetary policy together:
- policymakers need to work together to achieve economic goals
- economic policies do not exist in a vacuum
- policymakers = government
expansionary fiscal policy:
when the gov is in a recessionary gap
tools:
government spending increases
taxes decrease
expansionary monetary policy:
- to help get out of a recessionary gap*
tools: - decrease reserve ratio
- decrease discount rate
- buy bonds
contractionary fiscal policy:
when in an inflationary gap
tools:
- decrease government spending
- increase taxes
contractionary monetary policy:
when in an inflationary gap
tools:
- increase reserve ratio
- increase discount rate
- sell bonds
how does expansionary fiscal policy affect rGDP?
increase AD
increased output
decreased unemployment
higher PL
how does contractionary fiscal policy affect rGDP?
increase taxes
decrease consumer investment
decrease AD
how does expansionary monetary policy affect rGDP?
increase money supply increases output and consumer spending decrease interest rates increase investment spending increase AD
how does contractionary monetary policy affect rGDP?
decrease money supply increase interest rates increase price level decrease AD decrease real GDP
the phillips curve:
- shows the tradeoff between inflation and unemployment
- usually inverse relationship
The Phillips Curve and changes to aggregate demand:
when AD increases = inflation is high and unemployment is low
when AD decreases = inflation is low and unemployment is high
when AD shifts there is a movement along the SRPC
the phillips curve and changes to the short-run aggregate supply
AS increases = inflation is low and unemployment is low
AS decreases = inflation is high and unemployment is high
when AS shifts, there is a shift on the SRPC
the velocity of money:
average times a dollar is spent and re-spent in a year
quantity theory of money:
MxV=PxY PxY is nominal GDP M=Money Supply P=Price Level V=Velocity Y=Quantity of Output
money and inflation:
what happens in the long-run when the central bank increases the money supply?
- short-run spending eventually leads to higher resource prices and inflation
- if inflation is bad enough, banks do not lend and the economy tanks
deficit spending:
the trade-off increasing government spending without raising taxes to close a recessionary gap
budget deficit:
when annual government spending and transfer payments are greater than tax revenue
budget surplus:
when annual government spending and transfer payments are less than tax revenue
national debt:
- the accumulation of all the budget deficits over time
- government increases spending without increasing taxes, they will increase the annual deficit and national debt
entitlements:
whenever a federal program that requires payments to any eligible person or unit of government (mandatory spending must be paid)
- ex: social security
crowding out:
- the adverse effect of government borrowing on interest-sensitive private sector spending
- refers to a decrease in private investment due to an increase of borrowing by the government
if the government increases deficit spending, what happens to the loanable funds market?
- demand increases
- real interest rate increases
- quantity of private loans decreases
- economic growth in the long run decreases
what do economists use to measure economic growth and standard of living?
- REAL GDP PER CAPITA: the real divided by the population
- growth rate: change in real GDP per capita over time
- not nominal GDP since it doesn’t account for inflation
- not real GDP because it doesn’t account for population
government policies that result in long-run economic growth:
- education/ training spending
- increases human capital - infrastructure spending: public works like roads, bridges, and harbord
- increases physical capital - production/investment incentives programs: investment tax credits
- increase physical capital stock
- these are called “supply side policies”
