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What is the impact of contractionary monetary policy on inflation?
It reduces aggregate demand, helping to control inflation.
What is the impact of expansionary fiscal policy on inflation?
It increases aggregate demand, potentially leading to demand-pull inflation.
How can the Fed use the reserve ratio to combat inflation?
The Fed can increase the reserve ratio, reducing the amount of money banks can lend, thus decreasing the money supply and curbing inflation.
What is the effect of lowering the discount rate?
Lowering the discount rate encourages banks to borrow more from the Fed, increasing the money supply and potentially leading to inflation.
What is the effect of the government borrowing funds?
The government may need to borrow funds or the central bank may increase the money supply to finance the spending.
How does decreasing government spending affect inflation?
Decreasing government spending reduces aggregate demand, decreasing inflationary pressure.
How does increasing taxes affect inflation?
Increasing taxes reduces disposable income, decreasing aggregate demand and reducing inflationary pressure.
What are contractionary fiscal policies?
Policies that decrease government spending or increase taxes to reduce aggregate demand and control inflation.
What are expansionary monetary policies?
Policies that increase the money supply to stimulate economic growth, potentially leading to inflation.
How does increasing the money supply affect the price level?
According to the quantity theory of money, an increase in the money supply leads to a proportional increase in the price level, assuming constant velocity and real output.
Define inflation.
A rise in the general price level in an economy.
What is Demand-Pull Inflation?
Inflation caused by increased consumer demand shifting the AD curve to the right.
What is Cost-Push Inflation?
Inflation caused by decreased production due to increased input costs or supply shocks shifting SRAS left.
Define Wage-Price Spiral.
A self-perpetuating cycle where demand-pull and cost-push inflation reinforce each other.
What is Monetary Neutrality?
The idea that changes in the money supply only affect nominal variables, not real variables.
Define Velocity of Money.
How quickly money is spent and re-spent in an economy.
What is the Quantity Theory of Money?
Theory stating that at a constant velocity and GDP, an increase in the money supply leads to a proportional increase in prices.
Define Open Market Operations.
The buying and selling of government bonds by the Federal Reserve to influence the money supply.
What is the Reserve Ratio?
The fraction of a bank's deposits that it is required to keep in reserve.
Define Discount Rate.
The interest rate at which commercial banks can borrow money directly from the Fed.
In a Demand-Pull Inflation graph, what happens to the AD curve?
The AD curve shifts to the right, increasing both price level and real GDP.
In a Cost-Push Inflation graph, what happens to the SRAS curve?
The SRAS curve shifts to the left, increasing price levels but decreasing real GDP.
In a Wage-Price Spiral graph, what happens to the AD and SRAS curves?
The AD curve shifts right, and the SRAS curve shifts left, resulting in higher price levels with little change in real GDP.
What does the intersection of AD and SRAS represent?
The short-run equilibrium price level and output.
How is long-run equilibrium represented on an AD/AS graph?
The intersection of AD, SRAS, and LRAS curves.
What does a rightward shift of the AD curve indicate?
An increase in aggregate demand, potentially leading to demand-pull inflation.
What does a leftward shift of the SRAS curve indicate?
A decrease in short-run aggregate supply, potentially leading to cost-push inflation.
How does increased government spending affect the AD curve?
It shifts the AD curve to the right.
What happens to price level and output when SRAS shifts left?
Price level increases, and output decreases.
How to show the effect of increased government spending on the AD curve?
Shift the AD curve to the right, showing a new short-run equilibrium with a higher price level and a higher output.