Quiz 6 - Information Section 1 In this section, we're studying how economists measure two things: the size of an economy (with GDP) and average prices in an economy (with the GDP deflator and the Consumer Price Index). We want to understand these so that we can measure how economies grow (like the U.S., Australia, or China) or don't (like Haiti or the Democratic Republic of the Congo) after you adjust for the effects of rising prices (i.e. inflation). After you read the text, study this material, and we cover it is class, you should 1. Be able to explain (i) what fiscal and monetary policy are, (ii) how they influence the economy, and (iii) how they are currently being used in the U.S. This includes numbers for federal expenditures, taxes, debt, and deficit. (notes) 1. Fiscal policy Involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy Changes in federal expenditures and taxes (independently) Controlled by the President and Congress Government budget deficit = federal expenditures – federal taxes Borrowing (deficit) pays for any expenditures not covered by taxes Federal debt = accumulated deficits 2. Monetary policy Involves changing the interest rate and influencing the money supply (M1 and M2) Conducted by the Fed -> largely independent of the federal government Established by Congress and most key positions appointed by the President and confirmed by the Senate Fed’s “ dual mandate ” from Congress: “promote effectively the goals of maximum employment, stable prices” Fed Chair and head of FOMC: Janet Yellen FOMC increases federal funds rates o Higher costs for banks o Loan rates for consumers and firms increases o More expensive for firms and consumers to buy goods with credit o Slower growth (percent change real GDP) o Few jobs created, harder time finding a job, and fewer new firms 3. Be able to explain the limitations of GDP and the CPI. (Ch. 8.2 & 9.4) GDP Limitations are household and underground economy Household production refers to goods and services people produce for themselves
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- Fall '10