Macro exam 3

Chapter 11: Stabilization and Fiscal Policy

Q: What is stabilization policy, and how does it differ from growth policy?
A: Stabilization policy addresses short-term economic fluctuations (e.g., unemployment, inflation), while growth policy focuses on long-term economic capacity (e.g., investments in infrastructure, education).

Q: Why is the timing of stabilization policy important?
A: Poor timing due to lags in recognition, decision, or implementation can worsen economic fluctuations instead of stabilizing them.

Q: What is fiscal policy?
A: Fiscal policy involves government spending and taxation to influence the economy.

Q: How do taxes influence the GDP multiplier?
A: Higher taxes reduce disposable income, which lowers the multiplier effect by dampening consumer spending.

Q: What are automatic stabilizers?
A: Automatic stabilizers are mechanisms like progressive taxes and unemployment benefits that adjust automatically to economic changes without new legislation.

Q: What is the difference between expansionary and contractionary fiscal policy?
A: Expansionary policy increases spending or decreases taxes to boost demand, while contractionary policy decreases spending or increases taxes to reduce demand.

Q: Who decides whether fiscal policy involves spending or taxation?
A: Legislative bodies (e.g., Congress) and the executive branch (e.g., the President) decide fiscal policy.

Q: What are some difficulties in implementing stabilization policy?
A: Time lags, political constraints, forecasting challenges, and unintended consequences.

Q: What is supply-side fiscal policy?
A: It focuses on increasing productivity by reducing barriers like taxes and regulations.

Chapter 12: The Nature of Money

Q: What is money, and why is it useful?
A: Money is a medium of exchange, store of value, and unit of account, facilitating trade and economic efficiency.

Q: What is required for money to be money?
A: Money must be durable, divisible, portable, and stable in value.

Q: What is the difference between commodity money and fiat money?
A: Commodity money has intrinsic value (e.g., gold), while fiat money derives value from government decree.

Q: How do economists measure money?
A: Economists use measures like M1 (currency, demand deposits) and M2 (M1 plus savings accounts, time deposits).

Q: What is fractional reserve banking?
A: A system where banks keep a fraction of deposits as reserves and lend the rest.

Q: What is systemic risk, and what does "too big to fail" mean?
A: Systemic risk is the potential for failure in one institution to disrupt the entire economy. "Too big to fail" refers to large institutions that receive government bailouts to prevent economic collapse.

Q: How do private banks influence the money supply?
A: By lending out deposits, banks increase the money supply through the money creation process.

Q: What is the money multiplier?
A: A formula showing how initial deposits lead to a larger increase in total money supply.

Chapter 13: Monetary Policy and the Federal Reserve

Q: What is monetary policy?
A: Actions by a central bank to control the money supply and interest rates to influence economic activity.

Q: What is the Federal Reserve System?
A: The central bank of the United States, consisting of a Board of Governors and 12 regional banks.

Q: Why is central bank independence important?
A: It prevents political interference, ensuring policies focus on long-term stability rather than short-term political gains.

Q: What are open market operations?
A: The buying and selling of government bonds by the central bank to adjust the money supply.

Q: How are bond prices and interest rates related?
A: They are inversely related; when bond prices rise, interest rates fall.

Q: What are the four instruments of monetary policy?
A: Open market operations, discount rate, reserve requirements, and interest on excess reserves.

Q: Why are some economists concerned about excess reserves?
A: Large excess reserves could lead to inflation if banks suddenly increase lending.

Q: How does monetary policy affect aggregate demand?
A: Lower interest rates encourage borrowing and spending, increasing demand; higher rates have the opposite effect.

Public Choice Lesson

Q: What is public choice theory?
A: The application of economic principles to political decision-making.

Q: What is methodological individualism?
A: The concept that individual actions and decisions drive societal outcomes.

Q: What are difficulties in social choice?
A: Aggregating individual preferences into a collective decision is complex and may not yield optimal outcomes.

Q: What is a social welfare function?
A: A framework to evaluate and rank societal well-being based on collective preferences.

Q: What is logrolling?
A: A practice where legislators trade votes to pass laws benefiting each other's interests.

Game Theory

Q: What is game theory?
A: The study of strategic interactions where participants' decisions depend on others' actions.

Q: What are the basic setups in game theory?
A: Rules, matrix form (payoff tables), and extensive form (decision trees).

Q: What are dominant strategies?
A: Strategies that are optimal regardless of other players' actions.

Q: What is Nash equilibrium?
A: A situation where no player can improve their outcome by unilaterally changing their strategy.Q: What is a zero-sum game?A: A situation in which one player's gain is exactly balanced by another player's loss, meaning the total utility remains constant.