Fiscal and Monetary policies Macro Exam

Fiscal policy

Government decisions on spending and taxation; affects total spending, GDP, and inflation. (Chapter 21)

Government expenditure

Part of AD; includes purchases (tanks, judges, construction) and transfers (pensions, unemployment benefits). (Chapter 21)

Taxes

Reduce disposable income and private spending; influence investment and potential output. (Chapter 21)

Transfer payments

Payments like pensions, unemployment benefits; increase household income and consumption. (Chapter 21)

Cyclical deficit

Deficit caused by economic downturn (lower tax revenue, higher transfers). (Chapter 21)

Monetary policy

Central bank actions determining money supply; affects interest rates, investment, housing, and net exports. (Chapter 21)

Interest rate

The cost of borrowing; determined by central bank; influences investment and consumption. (Chapter 21)

Money supply

Controlled by central bank; increasing MS lowers interest rates and stimulates AD. (Chapter 21)

Incomes policy

Government attempts to moderate inflation via wage and price controls or persuasion. (Chapter 21)

Policy instruments

Fiscal policy, monetary policy, incomes policy, foreign economic policy. (Chapter 21)

Induced variables

Output, employment, unemployment, prices. (Chapter 21)

Exogenous variables

Foreign output, weather, wars, revolutions. (Chapter 21)

Aggregate supply

Goods and services firms are willing to produce; depends on price level, capacity, and costs. (Chapter 21)

Potential output

Maximum sustainable output when all resources are fully used efficiently. (Chapter 21)

Stagflation

Combination of stagnation (low output) and inflation; caused by supply shocks. (Chapter 21)