Section 6- Inflation, Unemployment, and Stabilization Policies
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| The budget deficit almost always ___ when unemployment rate ___ | rises, falls/rises, falls (direct relationship)
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| What are the main reasons of concern for repeated deficits? | 1. Crowding out effect
2. future budget plans
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| How can government pay off its debt? | 1. borrow from other banks
2. raise taxes, cut spending
3. printing money (risk of inflation)
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| Cyclically adjusted budget balance... | an estimate of the budget balance if the economy when at full potential, separates effects of the business cycle
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| debt-GDP ratio.. | widely used measure of fiscal health which remains stable or fall depending on growth of GDP over time
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| implicit liabilities.. | spending promises made by government that are effectively a debt but not included in debt statistics (Social security, Medicare)
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| When money supply ___, the interest rate ___ | increases, decreases
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| target federal funds... | rate the Federal Reserve uses to impact money supply and interest rate
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| The aggregate demand curve shifts in the ___ direction as the money supply curve when the Fed conducts monetary policy | same
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| monetary neutrality.. | changes in the money supply have no real effect on the economy, only on LR-price level
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| inflation tax.. | reduction in the value of money held by the public caused by inflation
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| cost push inflation | AS shifts to the left
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| demand pull inflation | AD shifts right
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| Three stages our economy is always in.. | 1.Recessionary gap
2. Inflationary gap
3. Equilibrium
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| There is an ___ relationship b/w inflation and unemployment.. | inverse
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| Frictional + Structural = | 5% of natural rate of unemployment
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| Every time AD curve shifts right or left, we must show ___ along SRPC | movement
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| Every time SRAS curve shifts left or right, we must show ___ along SRPC | shift
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| A negative supply shock shifts the SRPC ___, and a positive supply shock shifts the SRPC ___ | up, down
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| NAIRU... | nonaccelaerating inflation rate of unemployment
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| What is the relationship between inflation and unemployment in the long run? | There is no tradeoff b/w inflation and unemployment in the long run.
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| Government spending increases | Draw the effect on Phillips curve
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| The price of crude oil and most sources of energy decreases | Draw the effect on Phillips curve
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| Inflation expectations rise from 3% to 6% | Draw the effect on Phillips curve
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| The Fed increases interest rates with contractionary monetary policy | Draw the effect on Phillips curve
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| Inflation expectations fall from 5% to 2% | Draw the effect on Phillips curve
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| The government increases income taxes | Draw the effect on Phillips curve
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| Tornadoes strike the South and the Midwest destroying much of the nation's manufacturing ability | Draw the effect on Phillips curve
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| Consumer confidence falls amid the news of political squabbling | Draw the effect on Phillips curve
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| What is the definition of the long run in Macroeconomics? | "flexible wage in price" period
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| Personal income taxes increase | Draw the effect on AD-AS graph and Phillips curve
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| Cost push inflation | AS shifts left
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| Demand pull inflation | AD shifts right
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| Disinflation | process of bringing down the rate of inflation that has become embedded in expectations
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| What is deflation and who is hurt/helped by it? | Deflation is the falling aggregate price level. Lenders benefit under deflation since the real value of borrower's payments increase. Borrowers lose b/c the real burden of their debt increases. It reduces aggregate demand.
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| Quantity theory of money | demonstrates positive relationship b/w price level and money supply: MV=PY
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| Discretionary monetary policy | adjusting interest rate or money supply by central bank to stabilize economy
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| Governments that run large deficits can.. | finance the deficit by printing money
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| Modern consensus in macroeconomics | Prices are flexible in the long run but are likely to be sticky in the short run; in the long run, the macro economy will produce at the full employment level of output
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| monetary policy rule | central bank uses a formula that determines its actions
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