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Macroeconomics: Monetary and Fiscal Policy

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1/23
  • What is monetary policy?

    Monetary policy is the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic objectives like price stability and high employment.

  • What are the Fed's four main monetary policy goals?

    (a) Price stability
    (b) High employment (dual mandate)
    (c) Stability of financial markets and institutions
    (d) Economic growth

  • What is the federal funds rate?

    The interest rate banks charge each other for overnight loans, targeted by the Federal Open Market Committee (FOMC) but not directly controlled.

  • What is the Interest on Reserve Balances (IORB)?

    Interest paid by the Fed to banks for reserves held, used as a tool to influence the federal funds rate in an ample-reserves regime.

  • What is the zero lower bound in monetary policy?

    The fact that the federal funds rate cannot go below zero, limiting traditional monetary policy tools.

  • What is quantitative easing?

    A Fed policy to increase aggregate demand by buying long-term securities like 10-year Treasury notes.

  • How does expansionary monetary policy affect aggregate demand?

    Lowering the federal funds rate reduces interest rates, increasing investment, consumption, and net exports, shifting AD right, raising real GDP and price level.

  • How does contractionary monetary policy affect aggregate demand?

    Raising the federal funds rate increases interest rates, decreasing investment, consumption, and net exports, shifting AD left, lowering real GDP and price level.

  • What is the Taylor Rule?

    A formula linking the Fed's federal funds rate target to current inflation, equilibrium real rate, inflation gap, and output gap.

  • What is fiscal policy?

    Changes in federal taxes and government purchases intended to achieve macroeconomic objectives.

  • What are automatic stabilizers in fiscal policy?

    Government spending and taxes that automatically increase or decrease with the business cycle without new legislation.

  • What is expansionary fiscal policy?

    Increasing government purchases or decreasing taxes to shift aggregate demand right, raising real GDP and price level.

  • What is contractionary fiscal policy?

    Decreasing government purchases or increasing taxes to shift aggregate demand left, lowering real GDP and price level.

  • What is the government purchases multiplier?

    The ratio of the change in equilibrium real GDP to the change in government purchases, showing how spending affects GDP.

  • What is the tax multiplier?

    The ratio of the change in equilibrium real GDP to the change in taxes, showing how tax changes affect GDP.

  • Why might fiscal policy be less effective than monetary policy?

    Due to timing delays in legislation and implementation, and possible crowding out of private spending.

  • What is a budget deficit?

    When government expenditures exceed tax revenue in a given period.

  • What is the federal government debt?

    The total value of government securities outstanding, also called the national debt.

  • What determines the long-run growth rate of real GDP?

    The growth in hours worked plus the growth rate of labor productivity (real GDP per hour worked).

  • What is the tax wedge?

    The difference between pretax and posttax returns to economic activity, which can distort incentives and reduce economic activity.

  • How do individual income taxes affect the economy?

    They influence labor supply decisions and returns to entrepreneurship.

  • How do corporate income taxes affect the economy?

    They affect firms' incentives to invest.

  • How do taxes on dividends and capital gains affect the economy?

    They influence the supply of loanable funds from households to firms and thus the real interest rate.