Unit 5 - Long-Run Consequences of Stabilization Prices

What monetary policy does buying bonds, decreasing the reserve ratio, and decreasing the discount rate fall under?

Expansionary monetary policy

What monetary policy does selling bonds, increasing the reserve ratio, and increasing the discount rate fall under?

Contractionary monetary policy

Effect of buying bonds

increase in money supply decrease in interest rate → more investment → increase in aggregate demand

Effect of selling bonds

decrease in money supply increase in interest rate → less investment → decrease in aggregate demand

Expansionary fiscal policy includes

an increase in government spending and a decrease in taxes

Contractionary fiscal policy includes

an decrease in government spending and a increase in taxes

What does a budget deficit (expansionary FP) lead to?

Higher interest rates that will OFFSET the increase in AD.

What does a budget surplus (contractionary FP) lead to?

Lower interest rates that will OFFSET the decrease in AD

An economy is always operating at a point on what curve?

the short-run philips curve (SRPC)

What does the SRPC show?

all the combinations of possible output and unemployment given expectations about inflation