Modules 30 and 31

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Long-Run Implications

of Fiscal Policy

Monetary Policy and AD

Monetary Policy

in Practice

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Monetary Policy

and the Interest Rate

The Budget Balance

A negative budget balance.

What is a deficit?

The difference between the government’s tax

revenues, and its spending on goods and services plus government transfers in a

given year.

What is a budget balance?

The year the US federal

government ran a record budget

surplus.

What was 2000?

When revenues equal spending in a

fiscal year.

What is a balanced budget?

An estimate of what the budget balance

would be if there were neither a recessionary

nor an inflationary gap.

What is a cyclically adjusted budget

balance?

A measure used to assess the ability of

governments to repay their debt.

What is the debt-GDP ratio?

When a government stops

paying what it owes.

What is default on the debt?

Government debt held by individuals

and institutions outside the

government.

What is the public debt?

When government “competes” with firms to borrow

funds.

What is “crowding out”?

Spending promises made by government that are

effectively a debt, despite the fact that they are not

included in the debt statistics.

What are implicit liabilities?

Every 6 weeks they meet to decide on the interest rate to

prevail in the economy.

What are the Federal Open

Market Committee?

What a reduction in the money

supply will do to the interest rate.

What is increase the interest rate?

Operations to increase or reduce the money supply.

What are open-market operations?

The interest rate that is targeted

through monetary policy.

What is the federal funds rate?

The three tools of monetary policy.

What are the required reserve ratio, the

discount window and the open market

operations?

This results after the Fed increases the

money supply, causing the interest rate to fall,

and investment to increase.

What is a rise in real GDP?

This monetary policy shifts AD to

the right.

What is expansionary

monetary policy?

This monetary policy shifts AD to

the left.

What is contractionary

monetary policy?

What the aggregate price level does

after the Fed enacts expansionary

monetary policy.

What is increase?

AD will move in this direction when the Fed reduces the

money supply.

What is to the left?

The percentage difference between

actual real GDP and potential

output.

What is the output gap?

Policy makers fight recessions and try

to ensure this.

What is price stability?

A rule for setting the federal funds rate that takes into account the inflation rate and the

output gap.

What is the Taylor Rule?

When the central bank sets an explicit value for the inflation rate and enacts monetary policy in order to hit

this value.

What is inflation targeting?

The two main advantages of

inflation targeting.

What are transparency and accountability?

Make your wager

The Taylor Rule equation.

What is the federal funds rate should equal 1 + (1.5*inflation rate)

+ (0.5*output gap)?