All Flashcards
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.
How does increasing the money supply impact interest rates?
Increasing the money supply leads to lower interest rates.
How does increased government spending affect Aggregate Demand?
Increased government spending boosts Aggregate Demand, shifting the AD curve to the right.
How do labor shortages cause inflation?
Labor shortages increase input costs, leading to cost-push inflation.
How does the Fed use open market operations to combat inflation?
The Fed sells government bonds to decrease the money supply, which can cool down inflation.
How does monetary neutrality apply in the long run?
In the long run, changes in the money supply only affect nominal variables like prices, not real variables like output.
How does a decrease in consumer confidence impact demand-pull inflation?
A decrease in consumer confidence decreases consumer spending, reducing the likelihood of demand-pull inflation.
How does a supply shock affect SRAS?
A negative supply shock shifts the SRAS curve to the left, leading to higher prices and lower output.
How does a central bank combat demand-pull inflation?
A central bank can use contractionary monetary policy to reduce aggregate demand and control demand-pull inflation.
Explain how lower interest rates can lead to inflation.
Lower interest rates encourage borrowing and spending, increasing aggregate demand and potentially causing demand-pull inflation.
How does increased productivity affect cost-push inflation?
Increased productivity can offset increased input costs, reducing the likelihood of cost-push inflation.
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.