Macro exam 3

chapters 11-13

What is stabilization policy, and how does it differ from growth policy?

Stabilization policy addresses short-term economic fluctuations, while growth policy focuses on long-term economic capacity.

Why is the timing of stabilization policy important?

Poor timing can worsen economic fluctuations instead of stabilizing them.

What is fiscal policy?

Fiscal policy involves government spending and taxation to influence the economy.

How do taxes influence the GDP multiplier?

Higher taxes reduce disposable income, which lowers the multiplier effect by dampening consumer spending.

What are automatic stabilizers?

Automatic stabilizers adjust automatically to economic changes without new legislation.

What is the difference between expansionary and contractionary fiscal policy?

Expansionary policy increases spending or decreases taxes, while contractionary policy decreases spending or increases taxes.

Who decides whether fiscal policy involves spending or taxation?

Legislative bodies and the executive branch decide fiscal policy.

What are some difficulties in implementing stabilization policy?

Time lags, political constraints, forecasting challenges, and unintended consequences.

What is supply-side fiscal policy?

It focuses on increasing productivity by reducing barriers like taxes and regulations.

What is money, and why is it useful?

Money is a medium of exchange, store of value, and unit of account, facilitating trade and economic efficiency.

What is required for money to be money?

Money must be durable, divisible, portable, and stable in value.

What is the difference between commodity money and fiat money?

Commodity money has intrinsic value, while fiat money derives value from government decree.

How do economists measure money?

Economists use measures like M1 and M2.

What is fractional reserve banking?

A system where banks keep a fraction of deposits as reserves and lend the rest.

What is systemic risk, and what does 'too big to fail' mean?

Systemic risk is the potential for one institution's failure to disrupt the economy; 'too big to fail' refers to large institutions receiving bailouts.

How do private banks influence the money supply?

By lending out deposits, banks increase the money supply.

What is the money multiplier?

A formula showing how initial deposits lead to a larger increase in total money supply.

What is monetary policy?

Actions by a central bank to control the money supply and interest rates to influence economic activity.

What is the Federal Reserve System?

The central bank of the United States.

Why is central bank independence important?

It prevents political interference, ensuring focus on long-term stability.

What are open market operations?

The buying and selling of government bonds by the central bank.

How are bond prices and interest rates related?

They are inversely related; when bond prices rise, interest rates fall.

What are the four instruments of monetary policy?

Open market operations, discount rate, reserve requirements, and interest on excess reserves.

Why are some economists concerned about excess reserves?

Large excess reserves could lead to inflation if banks increase lending.

How does monetary policy affect aggregate demand?

Lower interest rates encourage borrowing and spending, increasing demand.

What is public choice theory?

The application of economic principles to political decision-making.

What is methodological individualism?

The concept that individual actions drive societal outcomes.

What are difficulties in social choice?

Aggregating individual preferences into a collective decision is complex.

What is a social welfare function?

A framework to evaluate societal well-being based on collective preferences.

What is logrolling?

A practice where legislators trade votes to pass beneficial laws.

What is game theory?

The study of strategic interactions where decisions depend on others' actions.

What are the basic setups in game theory?

Rules, matrix form, and extensive form.

What are dominant strategies?

Strategies that are optimal regardless of other players' actions.

What is Nash equilibrium?

A situation where no player can improve their outcome by changing their strategy.

What is a zero-sum game?

A situation where one player's gain is balanced by another player's loss.