Inflation Doves are members of the central bank that are not concerned with

Inflation doves are members of the central bank that

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Inflation Doves – are members of the central bank that are not concerned with keeping inflation rates lowBracket Creep – when inflation causes nominal incomes to rise putting them into a different tax bracketBracket creep is alleviated in the U.S. by attaching tax bracket to the consumer price index (CPI)Marginal Tax Rate – a rise in taxes that occurs when before-tax income increases by one dollar Economists use the marginal tax rate to assess the effect of tax rates on possible economic stimulantsAverage Tax Rate – is acquired by dividing taxes by before-tax incomeLower tax rates lead to higher potential output
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Automatic Stabilizers – are economic programs and policies that are in place and are designed to offset recessionary or expansionary periodsDo not require legislation to be in place – they are already in placeThey do not prevent recessions or expansionsoExamples: unemployment insurance, income taxes, food stamps, welfare paymentsConsidered to be nondiscretionary types of fiscal policyDiscretionary Fiscal Policy is generally targeted to a specific economic sector and can be easily changedCan be changed depending on economic situationsTheory of Rational Expectations – used by Robert Lucas in 1995Believe that individuals and businesses use all available information in order to make economic choices and anticipate the futureBelieve that fiscal policies are ineffective in altering the quantity of output in the economyTheory has not yet been proven or disprovenExpansion Policies – are aimed at ending or reducing the effects of recession through increasing the monetary supply and lowering interest ratesIf the economy is slow, unemployment is high, and aggregate demand and production are low, the government can attempt to expand the economy thru various monetary and fiscal policiesThe Fed will purchase U.S. Treasury SecuritiesMonetary Policies involve altering the money supply in order to combat recessions or periods of inflationWhile…Fiscal Policies involve changing government spending and taxes in order to fight recession or inflationFiscal Policy – is aimed at determining the amount of direction of government spending, to combat recession and inflationExamples include changing government spending and taxesIncreasing or decreasing government spendingIncreasing or decreasing taxesSupply-Side Fiscal Policies – know as ReagonomicsUse tax cuts on the wealthy and decrease government regulation in order to increase business investment, improve technology, increase employment, and decrease prices and inflationUsed in the 1980’s to combat the stagflation of the 1970sNot highly successful, resulted in large budget deficitsSupply –Side economics – shift the Aggregate Supply (AS) curve to the right by actions such as favorable tax policies, increased potential output, increased business investment, and decreased government regulation in
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