Multiplier effect & policy

expansionary fiscal policy

laws that reduce unemployment and increase GDP (close a recessionary gap)

increase government spending, decrease taxes, combinations of two

contractionary fiscal policy

laws that reduce inflation, decrease GDP (close a inflationary gap)

decrease government spneding

increases taxes

combos of the two

expansionary fiscal policy

laws that reduce unemployment and increase GDP (close a recessionary gap)

increase government spending, decrease taxes, combinations of two

contractionary fiscal policy

laws that reduce inflation, decrease GDP (close a inflationary gap)

decrease government spneding

increases taxes

combos of the two

marginal propensity to come

how much people consume rather than save when there ia change in income

change in consumption/change in income

marginal propensity to save

how much people save rather than consume when there is a change in income

change in savings/change in income

Calculating the spending mutliplier

spending multiplier=1/MPS

TOTAL change in GDP

multiplier x initial change in spending

simple tax multiplier

MPS x 1/MPS

Problems with Fiscal policy

national debt= accumulation of all the budget deficits over time

budgeted deficit: when the government’s expenditures exceeds its revenue

barter system

goods and services are traded directly. There is no money exchanged

commodity money

something that performs the function of money and has intrinsic value

fiat money

something that serves as money but has no other value or uses

first function of money

a medium of exchange: money can easily be used to buy goods and services with no complications of barter system

second function of money

a unit of account: money measures the value of all goods and services and acts a measurement of value

third function of money

money allows you to store purchasing power for the future

liquidity

ease with which can assent can be accessed and used as a medium of exchange

Highest liquidity

1. currency in circulation

2. checkable bank deposits

3. traveler’s checks

federal reserve

created in 1913, the FED’s job is to regulate banks and to conduct monetary policy

fractional reserve banking

when banks hold only a small portion of deposits to cover potential withdrawals and then loans the rest of the money out

demand deposits

money deposited in a commerical bank in checking accounts

required reserves

the percent the bank must hold by law

Required Reserves=Total Deposit Liabilities×Reserve Requirement Ratio

excess reserves

the amount the bank can loan out

Excess Reserves=Total Reserves−Required Reserves

money multiplier

1/reserve requirement (ratio)