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negative output gap (recession) monetary +fiscal shift
Money supply (up)
Interest rates (down)
Bank loans (up)
Price level (up)
Real Output (up)
Unemployment (down)
Budget surplus (down)
National debt (up)
velocity of money
the average times a dollar is spent and re-spent in a year.
What happens in the long-run when the central bank increases in the money supply?
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.
why do many economists support expansionary monetary policy?
Monetary policy can increase real output in the short-run.
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.
Assume the government increases deficit spending
What will happen to the demand for loanable funds, the real interest rate, and private domestic investment?
-Demand increases
-Real interest rate increases
-Private investment decreases (QPI) (even though public investment increased)
Crowding Out
The adverse effect of government borrowing on interest-sensitive private sector spending.
Increase in government deficit = (ir?)
The real interest rate increasing
Growth Rate
The change in real GDP per capita over time.
if investment increases, what happens in the short-run and long-run?
Capital Stock- Machinery and tools purchased by businesses that increase their output. (LRAS and AS and AD shift right and the PPC curves moves outwards)
An increase in consumption or net exports
doesn’t cause economic growth.