Econ - Unit 5

Monetary policy

Policy carried out by central banks

Fiscal policy

Policy carried out by the government

Expansionary fiscal policy

Increase spending and decrease taxes to boost AD

Expansionary monetary policy

Decrease interest rates to boost AD

Contractionary fiscal policy

Reduce spending or raise taxes to decrease AD

Contractionary monetary policy

Raise interest rates to decrease AD

Long Run effect of an increase in the money supply

Aggregate PL will increase but aggregate output will move back to potential output

Long Run effect of a decrease in the money supply

Aggregate PL decreases but aggregate output is back at potential output

Monetary Neutrality

Changes in the money supply have no real effects on the economy in the long run

Monetarism

GDP will grow steadily if the money supply grows steadily

Budget balance

T-G-TR (tax revenue-government purchases-government transfers)

Physical Capital

Man made goods such as buildings and machines used to produce other goods and services

Human Capital

Improvement in labor created by the education and knowledge of members of the workforce

Technology

Technical means for the production of goods and services