Vocabulary
What is another name for a recession?
Negative output gap or operating below full employment
What are the two fiscal policies that will help an economy get out of a recession?
Increase Government Spending and Decrease Taxes
Monetary policy primarily deals with what parts of AD?
C - interest sensitive spending
I- Business investment spending
The current exchange rate for the dollar and euro is 1 to 1. As a result of more Americans wanting European made goods, what will happen to the dollar?
Depreciate
A point inside a PPC is considered to be
Inefficient with cyclical unemployment
What is another name for an inflationary gap
Positive output gap or operating above full employment
What parts of AD are impacted by fiscal policy?
Government Spending - Government Spending
What are the 3 main tools the federal reserve has in an economy with limited reserves
Buy/Sell Bonds
Decrease / Increase RR
Decrease / Increase Discount Rate
If the Current Account is in a surplus then the Capital and Financial Account must be in a
Deficit
A country makes machines and bread. If they decide to allocate more resources right now to make bread, what will happen to the countries growth in the future?
It will decrease.
Fiscal Policy is associated with and Monetary Policy is associated with?
Federal Government and Federal Reserve
What is an example of a supply side fiscal policy and what will happen in the AD/SRAS model? Explain
Increase business subsidies or decrease business taxes which will cause the SRAS to shift to the right leading to lower unemployment and lower prices
What is the dual mandate of the federal reserve?
Low inflation - 2%
Low unemployment - 5%
The US and Japan are trading partners. The current exchange rate is 1 US$ to 5 Yen. If a coat costs 100 yen in japan, how much will it cost in US $?
20$
IF AD increases and AS increases, what is the one thing you can be certain about?
Output as increased
What is another name for an increase in capital goods?
An economy is in a recession. The federal government decides to increase government spending without raising taxes. Will the economy get out of a recession? Explain
No - the increase in government spending will increase AD, but the spending will push borrowing costs up leading to less business investment which will decrease AD.
The Federal Reserve decides to take action because the economy is overheating . What open market operation should they use and what impact will it have on interest rates?
Sell Bonds, IR increase
A depreciated dollar will have what impact on AD and what impact will it have on the Balance of Payments
AD will increase as exports will increase. Therefore, CA will be in a surplus and CFA will be in a deficit.
If the price of a basket of goods in Year 1 is 200, and in year 2 they are 300, how much inflation occurred and how is that represented as an index number?
50% and 150
What is another name for an increase in government spending without raising taxes or government spending financed by borrowing?
deficit spending
An increase in government spending without raising taxes will have what impact on business investment and growth in the future? Explain
An increase in government spending financed by borrowing will cause the RIR to increase leading to less business investment and less growth in the future
If the Federal Reserve buys bonds, what will happen to bond prices? Explain
Bond prices will increase because the purchase of bonds will push interest rates lower. Bond prices and interest rates have an inverse relationship.
The US and Canada are trading partners. Due to policy changes, the interest rate in the US has now increased. Explain what will happen to the US$ in the forex market and the impact this change will have on AD in the US
The US dollar will appreciate and the US will experience capital inflows. Canadian investors will seek a higher return on their investments. As a result of the appreciated $, AD will shift to the left because there will be less exports as American goods became more expensive
If a government and central bank decides to do nothing to address a recession, what will eventually happen? Explain
SRAS will shift to the right because unemployed workers will accept lower nominal wages