Term
|
Definition
| Economists who believe that discretionary changes in monetary and fiscal policy can reduce the degree of instability in output and employment. |
|
|
Term
|
Definition
| Economists who believe that discretionary macro policy adjustment in response to cyclical conditions are likely to increase, rather than reduce, instability. Nonactivists favor steady and predictable policies regardless of business conditions. |
|
|
Term
|
Definition
| Time period between a change in economic conditions and recognition by policy makers. |
|
|
Term
|
Definition
| Time period to make change in policy. |
|
|
Term
|
Definition
| Time period after implementation before primary effects. |
|
|
Term
| Index of Leading Indicators |
|
Definition
| Economic variables that decrease before economic downturn and vice versa before an upturn. |
|
|
Term
| Adaptive-expectations hypothesis |
|
Definition
| Decisions about expectations are made based on actual outcomes in recent periods. Prone to errors. |
|
|
Term
| Rational-expectations hypothesis |
|
Definition
| Decisions are made by weighing all possible evidence including current and future economic situations. |
|
|
Term
| Differences between Rational and Adaptive |
|
Definition
1. How quickly people adjust to a change
2. The likelihood of systematic forecasting errors. |
|
|
Term
|
Definition
| Agreement that automatically adjusts money wage rates as price level rises. |
|
|
Term
|
Definition
Illustrates the relationship between rate of inflation and the rate of unemployment.
Ignored expected rates of inflation. |
|
|
Term
| Modern Expectational Phillips Curve |
|
Definition
| Employment increases when people underestimate inflation. Employment decreases when people overestimate inflation. |
|
|
Term
| Natural Rate of Employment |
|
Definition
| Present when the inflation rate is neither rising nor falling. |
|
|
Term
|
Definition
1. Timing is difficult, constant policy switches can do more harm than good.
2. Expansionary policies that generate strong demand and inflation will not reduce the rate of unemployment below the natural rate, at least not for long.
3. Price stability is the proper goal for of monetary policy. |
|
|
Term
|
Definition
1. Does fiscal policy exert much impact on aggregate demand?
2. During a recession, is govt spending more effective than a reduction in taxes?
3. Is instability the result of policy error or natural? |
|
|
Term
|
Definition
| Economists who believe that monetary instability is the major cause of fluctuations in real GDP and rapid growth of the money supply is the major cause of inflation. |
|
|
Term
|
Definition
| Curve that illustrates the relationship between the interest rate and the quantity of money people want to hold. Inverse relationship. |
|
|
Term
| Expansionary Monetary Policy |
|
Definition
| Additional bank reserves, lower short term interest rates, and an acceleration in the growth rate of the money supply are indicators of a more expansionary monetary policy. |
|
|
Term
| How does monetary policy affect the economy? |
|
Definition
1. The lower real interest rate will make current investment and consumption cheaper.
2. The lower interest rate will tend to cause financial capital to move abroad, the foreign exchange rate of the dollar to depreciate and net exports to expand.
3. The lower interest rate will tend to increase asset prices--for example, the prices of stocks, houses, and other structures people own--which will also increase aggregate demand. |
|
|
Term
| Restrictive Monetary Policy |
|
Definition
| To reduce aggregate demand on the general level. Reduction in bank reserves, higher short-term interest rates, and a reduction in the growth rate of a money supply. |
|
|
Term
|
Definition
| Hypothesizes that a change in the money supply will cause a proportional change in the price level because velocity and real output are unaffected by the quantity of money. |
|
|
Term
|
Definition
| The average number of times a dollar is used to purchase final goods and services during a year. It is equal to GDP divided by the stock of money. |
|
|
Term
|
Definition
| MV=PY, M is the money supply, V is velocity of money, P is the price level, Y is the output of goods and services. |
|
|
Term
| Money Growth and Inflation |
|
Definition
| Persistently low rates of money growth lead to low rates of inflation. |
|
|
Term
|
Definition
| If actual federal funds rate is below the target rate implied by the Taylot Rule, monetary policy is overly expansionary, there should be a shift to more restrictive policy. Vice versa. |
|
|
Term
|
Definition
1. Increase in mortgages loans extended.
2. Commercial and investment banks had low reserves compared to mortgage holdings.
3. Expansionary Monetary Policy: Interest Rates were too low. |
|
|
