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CLEP Macro Economics

Normative analysis is concern with analyzing whether

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Normative Analysis – is concern with analyzing whether or not a policy should be used Takes into account feelings and value Only concerned with economic results, not with public desirability Stabilization Policy – government policy aimed at stabilizing the economy by eliminating output gaps Directly affect aggregate spending in order to eliminate output gaps Stabilizing polices are more effective when there are large output gaps The GDP gap is the difference between the potential GDP and the actual GDP Expansionary Policy – government policies intended to increase spending and output Enacted during times of economic recession o Examples: spending or tax cuts to encourage growth Fiscal policies used by the Fed that are expansionary in direction attempts to combat a recession and manipulate the aggregate demand upward by cutting taxes and raising spending levels o Aimed at ending or reducing the effects of a recession Expansionary policies result in a deficit Automatic Stabilizers – programs and economic policies such as income taxes, unemployment insurance and TANF (Temporary Aid to Needy Families) that are automatically in place, help to decrease fluctuations in the GDP Policy Reaction Function – describes how the economy directly effects the actions policymakers take
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Famous policy reaction function is Tyler’s rule, which adds the output gap amount as third determinant of the real interest rate set by the Federal Reserve Supply-Side Policy – a policy that affects the potential output Most supply side policies aim to enable the free market to work more efficiently by reducing government interference o Examples: Accommodating Policy – the federal government enacts this policy in order to let the effects of a shock run their course Inside Lag – the time between the need for a macroeconomic policy and its implementation Inside lag times for monetary policy tend to be shorter than lag times for fiscal policy Outside Lag – is the time between a policy implementation and its desired effects on an economy Outside lag time for fiscal policy tend to be shorter than the outside lag time for monetary policy because fiscal policies directly affect output and GDP levels Economy is made up of 4 Different Sectors 1. Goods and services sector 2. Labor sector 3. Monetary sector 4. International sector Goods and Services Sector – focuses largely on the level of income Also looks at the overall price level Respond slowly to shocks Macroeconomics is most concerned Changes in the Monetary and International Sectors affect this sector, by affecting the wage levels price levels Labor Sector – highlights the rates of pay Also concerned with the rate of employment and unemployment Macroeconomics is most concerned Monetary Sector – focuses on the interest rates Also highlights the economy’s money supply Respond quickly to shocks, because thousands are waiting to make money based on pricing changes
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Normative Analysis is concern with analyzing whether or not...

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