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Review Efficiency
Priority 11/64
Learn tools of fiscal policy
MPC Tax cut multiplier
Desired fiscal restraint=AD Excess/Multiplier
Cumulative Reduction in Spending=Multiplier*Initial Budget Cut
Budget cuts should equal the size of the desired fiscal restraint
Total change in spending = Multiplier*New spending Injection
A cut in transfer payments reduces the disposable income of transfer recipients
AD SHortfall: The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes.
AD Excess: The amount by which aggregate demand must be reduced to achieve full-employment equilibrium after allowing for price level changes.
Initial Increase in Consumption=MPC*Tax Cut
Tax increases reduce consumption spending
An increase/decrease in aggregate demand increases/decreases inflation
Multiplier Effect: Every Dollar of new government spending has a multiplied effect on aggregate demand
Priority 8/64
National Debt: Accumulated debt of the federal government
There is an opportunity cost to government spending
The risk of crowding out is greater the closer the economy is to full employment
Government spending can crowd out investment spending
External Financing allows us to get more public sector goods without cutting back on private sector production in the short run.
External Financing: Borrowing funds from abroad
Fiscal stimulus/restraint is gauged by an increase/decrease in the structural deficit
Structural Deficits are caused by fiscal policy
Structural Deficit: Federal Revenues at full employment-expenditures at full employment under current fiscal policy
Priority 8/64
M2=M1+Savings accounts
The creation of transaction deposits via new loans is the same thing as creating new money
Excess Reserves: Any extra money that is not required reserves
Savings and time deposits are ignored when determining required reserves
A bank's books either belong to the depositers or owners
Regulation is a constraint on the federal reserve system
Banks are required to hold a percentage of their checkable deposits
M1 is: Currency in Circulation, Transactions account balances, Traveler's checks
Potential Deposit Creation=Excess Reserves of Banking System*Money Multiplier
Money: Anything generally accepted as a medium of exchange
Bank Balances come from cash deposits and direct deposits
Deposits: The willingness of consumers and businesses to continue accepting checks or debit cards rather than cash
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