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The proposition that an increase in the federal budget deficit CAUSED ENTIRELY BY
A CURRENT TAX CUT HAS NO EFFECT ON AGGREGATE DEMAND IS
CALLED THE RICARDIAN EQUIVALENCE THEOREM.
According to the new clasical economists, if a tax cut is viewed as temporary, then there
may not be a significant increase in personal consumption.
SUPPLY SIDE ECONOMISTS ARGUE THAT LOWER TAX RATES WILL LEAD
TO INCREASED ECONOMIC GROWTH
One part of the supply side economics argument is that lower marginal tax rates can
increase total tax revenues.
Automatic stabilizers are provisions that cause changes in government spending and
taxes that do not take the action of Congress or the President
In the United States economy, the progressive income tax and unemployment
compensation are both automatic stabilizers
According to traditional Keynesian economics, expansionary fiscal policy initiated by the
federal government is an appropriate way to prevent recessions and depressions.
CHAPTER 10
The reason we are willing to accept money with no intrinsic value is that WE HAVE A
FIDUCIARY MONETARY SYSTEM IN WHICH CURRENCY HAS BOTH
ACCEPTABILITY AND PREDICTABILITY OF VALUE
The Fed is said to be the lender of last resort in that it stands by to "bail out" any
depository institution that it has decided should not fail.
CHAPTER 11 and 12
The primary tool the Fed uses to control the money supply is open market operations
THE DISCOUNT RATE IS THE INTEREST RATE THE FED CHARGES ON LOANS
MADE TO DEPOSITORY INSTITUTIONS
In the Federal funds market, funds are repaid with the same 24 hour period
The FDIC was created because there were so many bank failures in the 1930’s
The price of bonds and the interest rate are inversely related.
In the classical view, an excess supply of money will lead to a higher price level.
Keynesians believe that when the Federal Reserve buys bonds, there will be an increase
in investment spending.
In an open economy, expansionary fiscal policy that creates deficit spending by U.S.
government borrowing is likely to lead to a reduction in exports.
Assume (other things constant) that the Fed increases the money supply. The mechanism
through which aggregate demand increases, according to Keynesians is increase in the
money supply – decrease in interest rates, increases in planned investment spending,-
increase in aggregate demand
The Fed would be pursuing an expansionary monetary policy if it were lowering the
required reserve ratio.
The Fed would be pursuing a contractionary monetary policy if it were raising the
discount rate
The U.S. economy did not go into a recession after the 1987 stock market crash because
the Fed prevented that by increasing money supply.
The stock market boom between 1995 and 2000 had actually increased consumption and
decreased saving.
Between August and October of 1987, the value of U.S. stocks fell by almost $1 trillion.
If you buy a bond from a firm, you are lending money to the firm.
The price-earning ratio of a stock is the ratio of the price of a share of stock to the
company's total earnings per share.