MACROECONOMICS MIDTERM 2 STUDY GUIDE
MACROECONOMICS MIDTERM 2 STUDY GUIDE 2105 025
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This 8 page Study Guide was uploaded by Christina Smith on Saturday March 26, 2016. The Study Guide belongs to 2105 025 at Georgia State University taught by Mr. Apperson in Winter 2016. Since its upload, it has received 320 views. For similar materials see Macroeconomics in Economcs at Georgia State University.
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MACRO ECONOMICS STUDY GUIDE Macroeconomics Chapter 15 Vocabulary Transfer Payments: Payments made to groups or individuals were no good or service is received in return. Government Outlays: Part of the government budget that includes both spending and transfer payments. Mandatory Outlays: Compromised government spending that is determined by ongoing longterm obligations. Medicare Income Tax Social Security Discretionary Outlays: Compromised spending that can be altered when the government is setting its annual budget. Social Security: A government administered to retirement funding program. The goal of social security is a guarantee that no American worker retires without at least some retirement income. Medicare: A mandated federal program that funds healthcare for US citizens age 65 or older. The goal is to ensure that all retired workers have some funding for their healthcare. Progressive Income Tax System: People with higher incomes pay larger portion of their income in taxes than people would lower incomes do. Marginal Tax Rate: The tax rate paid on an individual dollar of income. Marginal tax rate increases with higher earnings with a progressive tax system. Average Tax Rate: A total tax paid divided by the amount of taxable income. Will be less than the marginal tax rate due to progressive tax system. Budget deficit: Occurs when government outlays exceed revenue. Budget Surplus: Occurs when government revenues exceed outlays. Funding is flowing in and out. Debt: The sum total of accumulated budget deficits. Part of the debt is owed to the public. Part of the debt is owed to the government agencies. Austerity: Involves strict budget regulations aimed at debt reduction. From PowerPoint and Lecture Notes Income tax sources: 1. Individual income tax 2. Corporate income tax 3. Social Security [Both Social Security and Medicare are paid for with taxes on employees pay. Demographic changes are the main reason why Social Security and Medicare currently make up such a large portion of the budget. ] 1. Deficits growing outlays increase our revenues decrease or both 2. Recent U.S. budget deficits are large in historic context. Practice what you Know Questions 1. National Debt is the sum of yearly budget deficits. 2. Which of the following is part of mandatory outlays? Social Security. 3. Income taxes in the United States can be described as progressive 4. Security and Medicare outlays have increased in size recently. Quiz Government outlays include 1. Unemployment benefits 2. The construction of a new highway 3. Interest payments on US treasury bonds If the government rises the retirement age from 67 to 70, how would it impact government entitlement programs like Social Security and Medicare? It would decrease the government’s burden of the entitlement programs. Which of the following is false regarding the nature of a progressive income tax system? People of all income levels have to pay a fixed percentage of their income in taxes. During the Great Recession, the ratio of U.S. federal outlays to GDP _____________ the long run average, and the ratio of revenue to GDP ____________ the long run average. Climbed above; dipped below Examples of mandatory government outlays 1. The payment of health care expenses for those participating in the Medicare program (health care for the elderly) 2. Rental assistance payments made to those who are poor Which of the following policies would dramatically and permanently reduce government outlays? 1. Reducing the cost of living increase for Social Security recipients 2. Reducing the number of individuals eligible for food stamps True Scenarios 1. If a country ran budget deficits from 2000 to 2008 and then budget surpluses from 2009 to 2010, then this country will be in debt at the end of 2010. 2. If a country ran budget deficits from 2000 to 2002 and then budget surpluses from 2003 to 2010, then this country will have no debt at the end of 2010. 3. If a country balanced its budget from 2000 to 2010, then this country will have zero debt at the end of 2010. Calculations Outlays = GDP X Percent (Outlays) Revenue = GDP X Percent (Revenue) Total Outlays = Mandatory + Discretionary Marginal Tax Rate: 1. Calculate average tax rate 2. Multiply by tax brackets Debt to GDP Ratio: Dept / GDP Government Outlays = Gov. Spending + Transfer Payments Average Tax Rate: 1. Compute the total tax bill 2. Divide the tax bill by the taxable income CHAPTER 16 OF MACROECONOMICS Fiscal Policy When the government increases spending or decreases taxes to stimulate the economy toward expansion. Focus is to shift aggregate demand Back to full employment output Contra Dictionary Fiscal Policy Occurs when the government decreases spending or increases taxes to slow down economic expansion. Countercyclical Fiscal Policy Fiscal policy that seeks to come to counteract business cycle fluctuations. The Marginal Propensity The portion of additional income that is spent on consumption. The Spending Multiplier A formula to determine the total impact of spending for an initial change of a given amount. Automatic stabilizers Government programs that automatically implement countercyclical fiscal policy in response to economic conditions. EX: Progressive income tax rates, taxes on corporate profits, unemployment compensation, welfare programs Crowding-Out Occurs when private spending falls and supply increases in government spending. New Classical Critique Fiscal policy that asserts that increases in government spending and decreases in taxes are largely offset by increases in savings. Supply-Side Fiscal Policy Involves the use of government spending and taxes to affect the production side of the economy. Laffer–Curve An illustration of the relationship between tax rates and tax revenue. Shortcomings of Fiscal Policy: Time Lags: the effects of fiscal policy may be delayed by lags in recognition implementation and effectiveness. 1. Recognition Lag 2. Implementation Lag 3. Impact Lag Lags can cause Fiscal Policy to be delayed for a year or 18 months. Crowding-Out: Government spending can serve as a substitute for private spending. Even partial crowding out reduces the impact of physical stimulus Saving Shifts Notes: Marginal Propensity to Consume= change in consumption/ change in income Spending Multiplier= 1/(1-MPC) CHAPTER 17 OF MACROECONOMICS Currency The paper bills and coins that are used to buy goods and services. Medium of Exchange What people trade for goods and services. Barter Involves a trade of a good or service without a commonly accepted medium of exchange. Double Coincidence of Wants Occurs when each party in an exchange transaction happens to have what the other party desires. Commodity Money Involve the use of an actual place of money. Commodity Backed Money Money that can be exchanged for a commodity at a fixed rate. Fiat Money Has no value except as a medium of exchange. A Unit of Account The measure in which prices are quoted. Store of Value A means for holding well. Checkable Deposit Deposit in bank accounts from which depositories may make withdrawals by writing checks. M1 The money supply measure that is essentially composed of currency in checkable deposits. M2 The money supply measure that includes everything in M1 plus savings deposits, money market mutual funds, and small denomination time deposits. Balance sheet An accounting statement that summarizes a firm’s financial information. Assets The items that a firm owns. Liabilities The financial obligations a firm owes to others. Owners Equity The difference between a firm’s assets and its liabilities. Reserves The portion of bank deposits that are set aside and not lent out. Fractional Reserve Banking Occurs when banks hold only a fraction of deposit on reserve. Bank Run Occurs when many depositors attempt to withdraw their funds at the same time. Required Reserve Ratio The portion of deposits that banks are required to keep on reserve. Excess Reserves Any reserves held in excess of those required. Moral Hazard When a party that is protected from risk behaves differently from the way it would behave if it were fully exposed to the risk. Simple Money Multiplier The rate at which banks multiply money when all currency is deposited into banks and they hold no excess reserves. Federal Funds Deposits that private banks hold on reserve at the Federal Reserve. Federal Funds The interest rate on loans between private banks. Discount Loans Loans from the Federal Reserve to private banks. Discount Rate The interest rates on discount loans made by the Federal Reserve to private banks. Open Market Operations Involves the purchase or sale of bonds by the central bank. Quantitative easing The targeted use of open market operations in which the central bank by securities specifically targeted in certain markets. MONEY SUPPLY= CURRENCY + DEPOSITS REQUIRED RESERVES = REQUIRED RESERVE RATIO X DEPOSITS EXCESS RESERVES = TOTAL RESERVES – REQUIRED RESERVES SIMPLE MONEY MULTIPLIER = 1 / REQUIRED RESERVE RATIO CHAPTER 18 OF MACROECONOMICS Expansionary Monetary Policy Occurs when a central bank acts to increase the money supply in an effort to stimulate the economy. Contractionary Monetary Policy Occurs when a central bank acts to decrease the money supply. Monetary Neutrality The idea that money supply does not affect real economic variables. Phillips Curve Indicates a short run inverse relationship between inflation and unemployment rates. Adaptive Expectations Theory Holds that people's expectations based on their most recent experience. Stagflation The combination of high unemployment rates and high inflation. Rational Expectations Theory Holds that people form expectations on the basis of all available information. Active Monetary Policy Involves the strategic use of monetary policy to counteract macro economic expansion and contractions. Passive Monetary Policy Occurs when central banks purposefully choose to only stabilize money and price levels through monetary policy.
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