Econ 252: Chapter 13 Notes
Econ 252: Chapter 13 Notes ECON 252
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This 1 page Class Notes was uploaded by Zach Weinkauf on Sunday April 17, 2016. The Class Notes belongs to ECON 252 at Purdue University taught by Andres Vargas in Fall 2016. Since its upload, it has received 11 views. For similar materials see Macroeconomics in Economcs at Purdue University.
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Date Created: 04/17/16
Chapter 13: Countercyclical Macroeconomic Policy 13.1 – The Role of Countercyclical Policies in Economic Fluctuations Countercyclical Policies – attempt to reduce the intensity of economic fluctuations and smooth the growth rates of employment, GDP, and prices. Countercyclical Monetary Policy – conducted by the central bank, attempts to reduce economic fluctuations by manipulating bank reserves and interest rates. Countercyclical Fiscal Policy – passed by the legislative branch and signed into law by the executive branch, aims to reduce economic fluctuations by manipulating government expenditures and taxes. 13.2 – Countercyclical Monetary Policy Expansionary Monetary Policy – increases the quantity of bank reserves and lowers interest rates. Tools of the Fed: o Changing the reserve requirement o Changing the interest rate paid on reserves deposited at the Fed. o Lending from the discount window o Quantitative easing Long-Term Expected Real Interest Rate = Long-Term Nominal Interest Rate – Long-Term Expected Inflation Rate Contractionary Monetary Policy – slows down growth in bank reserves, raises interest rates, reduces borrowing, slows down growth in the money supply, and reduces the rate of inflation. Federal Funds Rate = Long-run federal funds rate target + 1.5(Inflation rate – inflation rate target) + 0.5(Output gap in percentage points) Output gap = (GDP – Trend GDP)/Trend GDP 13.3 – Countercyclical Fiscal Policy Expansionary Fiscal Policy – uses higher government expenditure and lower taxes to increase the growth rate of real GDP. Contractionary Fiscal Policy – uses lower government expenditure and higher taxes to reduce the growth rate of real GDP. Automatic Stabilizers – components of the government budget that automatically adjust to smooth out economic fluctuations. Crowding Out – rising government expenditure partially or even fully displaces expenditures by households and firms.
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